ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
TWENTIETH
CENTURY
GROUP
Select
Heritage
Growth
TABLE OF CONTENTS
Report Highlights .......................................................... 1
Our Message to You ......................................................... 2
Market Perspective ......................................................... 3
Select
Performance & Portfolio Information ..................................... 4
Management Q & A ........................................................ 5
Schedule of Investments ................................................. 8
Financial Highlights .................................................... 32
Heritage
Performance & Portfolio Information ..................................... 11
Management Q & A ........................................................ 12
Schedule of Investments ................................................. 15
Financial Highlights .................................................... 35
Growth
Performance & Portfolio Information ..................................... 18
Management Q & A ........................................................ 19
Schedule of Investments ................................................. 22
Financial Highlights .................................................... 38
Statements of Assets and Liabilities ....................................... 25
Statements of Operations ................................................... 26
Statements of Changes in Net Assets ........................................ 27
Notes to Financial Statements .............................................. 28
Independent Auditors' Report ............................................... 41
Proxy Voting Results ....................................................... 42
Share Class and Retirement
Account Information ........................................................ 45
Background Information
Investment Philosophy and Policies ...................................... 46
Comparative Indices ..................................................... 46
Investment Team Leaders ................................................. 46
Glossary ................................................................... 47
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios. We'
ve organized our funds into three distinct groups, based on investment style and
objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- --------------------------------------------------------------------------------
BENHAM AMERICAN CENTURY TWENTIETH CENTURY (reg.tm)
GROUP (reg.tm) GROUP GROUP
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- --------------------------------------------------------------------------------
Select
Heritage
Growth
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and American Century are registered marks of American Century
Services Corporation.
Benham Group is a registered mark of Benham Management Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* The U.S. stock market produced strong gains during the period, with the S&P
500 returning 32.10% for the year ended October 31, 1997. The S&P MidCap
* Large companies performed well in the first half of the year, but investor
sentiment shifted to small- and mid-cap companies in the second half.
* Low interest rates, a strong dollar and low inflation were among the factors
driving market performance.
SELECT
* Select's Investor Class posted a 27.89% return for the fiscal year ended
October 31, 1997. Select matched the S&P 500 through October 31, 1997, but
lagged the index in late 1996 when profit-taking and the market's move to
defensive stocks hurt some of Select's technology holdings.
* Fund performance benefited from substantial holdings in pharmaceutical and
energy companies, but was mildly dampened by the somewhat slower earnings of
several technology companies.
* Holdings in energy companies were decreased and positions in insurance
companies were increased.
HERITAGE
* Heritage's Investor Class posted a 29.56% return for the fiscal year ended
October 31, 1997. It produced a modest 4.8% return for the first half of the
year, but nearly quintupled that return in the latter half.
* The fund's investments in smaller-cap companies proved to be a benefit in the
third quarter, when investors turned to more aggressive companies that reported
strong second-quarter profits.
* Performance also was boosted by holdings in several computer and computer
services companies that performed well.
* Shareholders approved a proposal to allow fund managers to invest more of the
fund's assets in non-dividend paying companies, leading to an increase in these
stocks.
GROWTH
* Growth's Investor Class posted a 27.85% return for the fiscal year ending
October 31, 1997. The fund's 21.61% gain for the second half of the fiscal year
outpaced the S&P 500's 15.14% return in the same timeframe.
* Returns were lifted by the fund's substantial weighting in the technology
sector, and its investments in pharmaceutical and insurance companies also
contributed to performance.
* The average size of the companies in Growth's portfolio remained significantly
higher than it was 18 months ago.
SELECT
INVESTOR CLASS(1)
TOTAL RETURNS: AS OF 10/31/97
6 Months 15.26%(2)
1 Year 27.89%
NET ASSETS: $4.8 billion
(AS OF 10/31/97)
INCEPTION DATE: 6/30/71(3)
TICKER SYMBOL: TWCIX
HERITAGE
INVESTOR CLASS(1)
TOTAL RETURNS: AS OF 10/31/97
6 Months 23.63%(2)
1 Year 29.56%
NET ASSETS: $1.3 billion
(AS OF 10/31/97)
INCEPTION DATE: 11/10/87
TICKER SYMBOL: TWHIX
GROWTH
INVESTOR CLASS(1)
TOTAL RETURNS: AS OF 10/31/97
6 Months 21.61%(2)
1 Year 27.85%
NET ASSETS: $5.1 billion
(AS OF 10/31/97)
INCEPTION DATE: 6/30/71(3)
TICKER SYMBOL: TWCGX
(1) See Share Classes, page 45.
(2) Not annualized.
(3) This inception date corresponds with the management company's implementation
of its current investment practices.
Many of the investment terms in this report are defined in the Glossary on page
47.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[James E. Stowers, Jr. and James E. Stowers III photo]
The stock market's bull run continued in 1997, although there were a few
stumbles. In April, markets dipped following the Federal Reserve Board's
decision to raise short-term interest rates. In August, several widely-held
companies announced earnings disappointments and, in October, currency
devaluations in southeast Asia rumbled through markets worldwide. The U.S.
market rebounded after each period of turbulence, as the underlying strength of
the economy supported a continued advance in stock prices. Despite fallout from
Asian markets, there are many reasons to believe strong stock performance will
continue. Fundamental indicators of the U.S. economy's health remain solid,
providing an environment for companies to build earnings while surrendering a
smaller percentage of their gains to inflation.
In 1998, American Century will enter its 40th year, a landmark few mutual
fund companies can claim. During the 1990s, we have broadened our range of
investment choices dramatically. Today, American Century offers nearly 70 funds,
enabling us to meet a wide array of investor objectives.
The company's tradition of creating new opportunities for investors
continued in July, when we announced that J.P. Morgan had agreed to become a
significant minority shareholder in American Century. For more than 150 years,
J.P. Morgan has served institutions, governments and individuals with complex
financial needs. Within the framework of this proposed relationship, American
Century will continue to operate as an independent company. Our corporate
management team will remain the same, and the Stowers family will retain voting
control of the company. This proposed business partnership will allow us to
expand and enhance the investment tools and services we provide investors.
Another issue we began to address in 1997 was year 2000 compatibility. Many
of the world's computer systems are at risk because they cannot distinguish the
year 2000 from the year 1900. A team of computer professionals is reviewing each
of American Century's systems and programs to identify and fix those that could
cause problems. We expect our computer systems to be fully in compliance on this
issue by the end of 1998.
These are interesting times to be in the mutual fund industry, whether as an
investor or a CEO. Some analysts see inflation on the horizon. Others see
deflation, as global competition forces prices downward. Meanwhile, investors
enjoy new choices when investing for retirement, including the expanded
opportunities provided by the Taxpayer Relief Act of 1997. Whatever your needs
or outlook, we hope you will give us an opportunity to help you reach your
financial goals.
Sincerely,
/s/James E. Stowers, Jr.
James E. Stowers, Jr.
CHAIRMAN OF THE BOARD AND FOUNDER
/s/James E. Stowers III
James E. Stowers III
CHIEF EXECUTIVE OFFICER
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
U.S. STOCK MARKET PERFORMANCE
Growth of $1.00 of $1.00 for the year ended October 31, 1997
[line graph - data below]
S&P 500 S&P 400 Russell 2000
Oct 31, 96 1 1 1
Nov 30, 96 1.07 1.06 1.04
Dec 31, 96 1.06 1.06 1.07
Jan 31, 97 1.12 1.1 1.09
Feb 28, 97 1.13 1.09 1.06
Mar 31, 97 1.08 1.04 1.01
Apr 30, 97 1.15 1.07 1.02
May 31, 97 1.21 1.16 1.13
Jun 30, 97 1.27 1.2 1.18
Jul 31, 97 1.37 1.31 1.23
Aug 31, 97 1.29 1.31 1.26
Sep 30, 97 1.37 1.39 1.35
Oct 31, 97 1.32 1.33 1.29
Value on 10/31/97
S&P 500 $1.32
S&P MidCap 400 $1.33
Russell 200 $1.29
Comparative One-Year Returns for the year ended October 31, 1997
S&P 500 32.10%
S&P MidCap 400 32.67%
Russell 2000 29.33%
SOURCE: LIPPER ANALYTICAL SERVICES, INC.
THE YEAR IN REVIEW
On October 31, 1997, the U.S. economic expansion completed its eightieth
month, making it the third longest since World War II. A 106-month-long period
of sustained economic growth in the 1960s is the record holder, followed by a
92-month spell in the 1980s. What differentiates the recent expansion from
earlier ones is low inflation, with an average annual rate of just over 2%
during the decade and just 1.8% for the 10 months of 1997. Wage pressure, a key
component of inflation, has yet to materialize despite the lowest unemployment
rates since the early 1970s. U.S. corporations have used restructurings and
technological advances to increase productivity more rapidly than the demand for
labor. In the absence of inflationary pressure, interest rates have remained
low, reducing corporate borrowing costs. As a result, profit margins are at
their highest levels since 1969 and the economy has benefited greatly. It grew
at a torrid annual pace of 4.9% in the first quarter of 1997, the strongest
quarter in more than nine years. Growth in the second and third quarters
remained strong, at annual rates of 3.3% each quarter.
THE MARKETS
The stock market reflected this period of economic growth, with all sectors
showing robust returns. The chart above captures the market's climb during the
year ended October 31, 1997. Although the indices had a strong showing, the ride
was not smooth, with levels of volatility and volumes of shares traded setting
records in August and October. Whereas the S&P 500 was far ahead of the other
indices at April 30, 1997, the gap had closed six months later.
A handful of large, multinational stocks continued their two-year dominance
of the market until August, when Coca-Cola and Gillette announced earnings
disappointments. Other large companies followed with similar announcements,
leading to an abrupt halt in the market's relentless upward march and the
outperformance of large stocks. The S&P 500 Index was down 5.8% for the month of
August.
Stock prices resumed their move up in September; however, the gains of
small- and mid-cap stocks exceeded those of large caps. October saw another
reversal as the market reacted to news of currency devaluations across southeast
Asia. Those devaluations sent market indices plummeting in such emerging markets
as Thailand, Malaysia and Singapore. U.S. investors started paying attention
when the panic selling reached Hong Kong and European markets. The S&P 500
dropped 3.45% in October, the S&P MidCap 400 dropped 4.35% and the Russell 2000
fell 4.39% amid fears that the sell-off overseas would translate into reduced
corporate profits for U.S. multinational companies in 1998.
The relative outperformance of medium- and small-cap stocks later in the
year resulted from several factors. These companies' profits are not as
dependent on foreign trade as the profits of larger companies; small companies
were not tainted by the earnings disappointments that hurt the large-cap sector
over the summer and small-cap prices had reached very attractive levels relative
to earnings, positioning them for a strong rebound.
ANNUAL REPORT MARKET PERSPECTIVE 3
SELECT
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS LIFE OF FUND
- --------------------------------------------------------------------------------
INVESTOR CLASS (inception 6/30/71)(2)
Select .... 15.26% 27.89% 20.77% 14.79% 13.64% 16.99%
S&P 500 ... 15.14% 32.10% 27.45% 19.82% 17.13% 12.97%
- --------------------------------------------------------------------------------
ADVISOR CLASS (inception 8/8/97)
Select .............................................................. -2.57%
S&P 500 ............................................................. -1.61%
- --------------------------------------------------------------------------------
INSTITUTIONAL CLASS (inception 3/13/97)
Select 15.38% .................................................... 18.93%
S&P 500 15.14% .................................................... 17.40%
- ----------
(1) RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
(2) THIS INCEPTION DATE CORRESPONDS WITH THE MANAGEMENT COMPANY'S IMPLEMENTATION
OF ITS CURRENT INVESTMENT PHILOSOPHY AND PRACTICES.
See pages 45, 46 and 47 for more information about share classes, the
comparative indices and returns.
[mountain chart - data below]
VALUE ON 10/31/97:
$352,088 SELECT INVESTORS
$211,523 S&P 500 INDEX
DATE ACCT VALUE RETURN ACCT VALUE RETURN
SELECT S&P 500
Oct 31, 77 10000 - 10000
Oct 31, 78 13593 0.3593 10629 0.0629
Oct 31, 79 17947 0.7947 12256 0.2256
Oct 31, 80 32409 2.2409 16192 0.6192
Oct 31, 81 33947 2.3947 16281 0.6281
Oct 31, 82 43276 3.3276 18939 0.8939
Oct 31, 83 63356 5.3356 24220 1.422
Oct 31, 84 57483 4.7483 25746 1.5746
Oct 31, 85 69534 5.9534 30726 2.0726
Oct 31, 86 94658 8.4658 40911 3.0911
Oct 31, 87 97946 8.7946 43506 3.3506
Oct 31, 88 105114 9.5114 49960 3.996
Oct 31, 89 139379 12.9379 63084 5.3084
Oct 31, 90 136542 12.6542 58342 4.8342
Oct 31, 91 173489 16.3489 77886 6.7886
Oct 31, 92 176554 16.6554 85621 7.5621
Oct 31, 93 215766 20.5766 98366 8.8366
Oct 31, 94 199863 18.9863 102173 9.2173
Oct 31, 95 229882 21.9882 129103 11.9103
Oct 31, 96 275299 26.5299 160123 15.0123
Oct 31, 97 352088 34.2088 211523 20.1523
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. Data quoted is for Investor Class only; performance for other
classes will vary due to differences in fee structures (see the Total Returns
table above).
The line representing Select's total return includes operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
return line of the S&P 500 does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Companies 86 77
Median Price/Earnings Ratio 24.4 24.6
Portfolio Turnover
94% 105%
Expense Ratio (for Investor Class) 1.00% 1.00%
4 SELECT AMERICAN CENTURY INVESTMENTS
SELECT
MANAGEMENT Q&A
An interview with Jean Ledford, portfolio manager on the Select investment
team. Note: all fund returns referenced in this interview are for investor class
shares.
How did Select perform?
For the year ended October 31, 1997, Select performed well, returning
27.89%..The fund continued to benefit from a bull market in which investors
favored the stocks of larger companies. These companies have prospered in the
face of low interest rates, a strong dollar and low inflation.
The S&P 500's total return for the year ended October 31, 1997, was 32.10%.
Select's underperformance versus the S&P 500 occurred in late 1996. As explained
in the April 30, 1997, semiannual report, Select held several large-cap
technology and retail stocks that suffered price declines in the wake of 1996
year-end profit taking. The fund's calendar year-to-date 25.05% return (as of
October 31, 1997) closely tracked the S&P 500's 25.11% gain over the same
period.
What sectors or individual stocks helped boost the fund's returns during the
period?
Some of the fund's best-performing stocks were in the pharmaceutical and
energy industries. Select held substantial weightings in drug manufacturers
(more than 12% of fund assets at the end of the period) that included Eli Lilly
& Co., Warner-Lambert Co. and Pfizer, Inc. All three companies reaped
significant benefits from the release or announcement of new products. Eli
Lilly's margins continued to rise from sales of Zyprexa, a schizophrenia
medication that was approved in late 1996 and racked up sales of $200 million
during the first half of 1997 alone. Lilly also expects to benefit from a new
osteoporosis drug that is currently awaiting FDA approval. Warner-Lambert's
profits were similarly lifted by the sales of Rezulin, a
[SELECT BAR CHART - data below]
SELECT'S ONE-YEAR RETURNS OVER 10 YEARS (Periods ended October 31)
SELECT S&P 500
10/88 7.31% 14.83%
10/89 32.59% 26.27%
10/90 -2.03% -7.52%
10/91 27.05% 33.50%
10/92 1.76% 9.93%
10/93 22.20% 14.89%
10/94 -7.37% 3.87%
10/95 15.02% 26.36%
10/96 19.76% 24.03%
10/97 27.89% 32.10%
This chart illustrates the fund's returns over the past 10 years and compares
them with the S&P 500's returns. The fund's total returns include operating
expenses, while the S&P 500's returns do not. See page 46 for a description of
the index. Past performance is no guarantee of future results. Investment return
and principal value will fluctuate, and redemption value may be more or less
than original cost.
* Investor Class.
ANNUAL REPORT SELECT 5
SELECT
product for treating diabetes, and Lipitor, a cholesterol-reducing medication
that the company is co-promoting with Pfizer. Sales of the two drugs are
expected to total more than $1 billion by the end of 1997.
In the energy sector, the fund's holdings in energy services stocks totaled
6.3% at the end of the period. Stocks that added to performance include Falcon
Drilling, BJ Services Company and Diamond Offshore Drilling. The energy services
industry and these leading companies continued to benefit from the growing
global demand for oil and gas, as well as advances in offshore drilling
technology that have reduced the cost of drilling and made exploration more
profitable.
What stocks were disappointing in 1997?
We purchased the stock of Silicon Graphics (SGI) in the second quarter, when
the company was demonstrating healthy earnings and revenues. Production
bottlenecks had created a backlog of demand for its product in the U.S. and
sales were robust. In addition, SGI was enjoying better-than-expected sales in
Europe. This unexpected demand abroad led the company to release
overly-optimistic estimates for its third-quarter earnings. Meanwhile, the
company's server business, which had contributed greatly to growth in the
preceding quarters, slowed significantly during the summer months. In October,
SGI announced that third-quarter earnings would be far below the optimistic
estimates previously announced, and as a result, the stock's price declined
substantially.
Our holdings in Corning, Inc., a manufacturer of optical fibers, also had a
negative effect on the fund's performance. Corning has enjoyed consistently
strong growth over the last five years and its pricing power has been
exceptionally good. Its long-running success is due in part to its flexibility
in stepping up production to meet increased demand. Rapid growth continued to
heighten demand and Corning's customers, fearing a future shortage, began to
double- and triple-order. This resulted in an inventory build-up, and when
demand slowed and Corning's customers delayed orders, the company was left with
excess inventory.
What changes did you make to the portfolio since the semiannual report?
Although we did not make any major shifts from one industry or sector to
another, we did shift weightings within several sectors. For example, we reduced
the fund's holdings in oil and gas companies by more than half as earnings in
this sector slowed. On the buy side, we increased holdings in insurance
companies from 1.7% of assets to 4.4% because we expect these stocks to continue
to perform well in the current benign interest rate environment.
TOP TEN HOLDINGS % of fund investments
As of As of
10/31/97 4/30/97
General Electric Co. (U.S.) 3.5% 3.7%
Tyco International, Ltd. 3.2% 3.3%
Eli Lilly & Co. 2.7% 2.0%
Microsoft Corp. 2.5% 2.9%
Procter & Gamble Co. (The) 2.4% 3.1%
Coca-Cola Company (The) 2.2% 2.4%
American International Group, Inc. 2.1% --
Warner-Lambert Co. 1.9% 1.7%
Textron Inc. 1.8% 2.0%
Bristol-Myers Squibb Co. 1.8% 1.6%
TOP FIVE INDUSTRIES % of fund investments
As of As of
10/31/97 4/30/97
Pharmaceuticals 12.4% 13.7%
Diversified Companies 8.9% 11.6%
Energy (Services) 6.3% 5.5%
Food & Beverage 5.9% 5.1%
Computer Software & Services 5.5% 6.8%
6 SELECT AMERICAN CENTURY INVESTMENTS
SELECT
What is your outlook for the fund?
We believe Select will continue to benefit from changes we have made in how
the fund is managed. In 1995, investors approved a change that allows the
management team to invest up to 20% of the fund's assets in companies that do
not pay a dividend. The vote enabled the fund to participate in the dramatic
growth demonstrated by companies such as Microsoft Corp., which was the
best-performing stock in the portfolio during 1997, and Compaq Computer Corp.,
another very good performer. These companies represent a significant percentage
of the S&P 500 and helped fuel its recent strong performance.
In addition, we believe that our heightened emphasis on research will
continue to enhance returns. We are allocating more resources to researching the
companies we buy and the business environments in which they operate, which
gives us greater insight into what drives their success and whether their growth
rates are sustainable. Finally, we have attempted to reduce risk by diversifying
Select's assets more broadly across industries and sectors. We believe this will
add a measure of additional stability to returns in times of increased market
volatility.
Were there any changes to Select's management team?
Yes. Chuck Duboc, a member of the Select management team since 1994, left in
September to pursue other business interests. However, the fund remains in the
capable hands of a team of investment professionals with a combined 35 years of
investment experience. Each analyst on the Select team specializes in several
industries or sectors and, together, we work to develop a firm consensus
regarding the stocks we want in the portfolio. The fund's performance this year
indicates that our team approach has been successful.
ANNUAL REPORT SELECT 7
SCHEDULE OF INVESTMENTS
SELECT
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS
AEROSPACE & DEFENSE-3.2%
725,000 Boeing Co. $ 34,709
1,510,000 Textron Inc. 87,297
425,000 United Technologies Corp. 29,750
---------------
151,756
---------------
BANKING-4.9%
1,350,000 Bank of New York Co., Inc. (The) 63,534
740,000 BankAmerica Corp. 52,910
475,000 Chase Manhattan Corp. 54,803
529,000 Citicorp 66,158
---------------
237,405
---------------
BROADCASTING & MEDIA-1.4%
1,150,000 Time Warner Inc. 66,341
---------------
CHEMICALS & RESINS-1.4%
800,000 du Pont (E.I.) de Nemours & Co. 45,500
730,000 Morton International, Inc. 24,090
---------------
69,590
---------------
COMMUNICATIONS EQUIPMENT-2.0%
525,000 Ericsson (L.M.) Telephone Co. ADR 23,264
425,200 Lucent Technologies Inc. 35,052
385,000 Motorola, Inc. 23,774
175,000 Northern Telecom Ltd. 15,695
---------------
97,785
---------------
COMMUNICATIONS SERVICES-4.1%
1,080,000 AT&T Corp. 52,853
155,000 Bell Atlantic Corp. 12,381
670,000 BellSouth Corp. 31,699
610,000 SBC Communications Inc. 38,811
1,895,000 Worldcom, Inc.(1) 63,660
---------------
199,404
---------------
COMPUTER PERIPHERALS-1.7%
985,000 Cisco Systems Inc.(1) 80,801
---------------
COMPUTER SOFTWARE & SERVICES-5.5%
1,020,000 Autodesk, Inc. 37,676
950,000 BMC Software, Inc.(1) 57,238
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
215,000 Computer Sciences Corp.(1) $ 15,252
930,000 Microsoft Corp.(1) 120,842
870,000 Oracle Systems Corp.(1) 31,130
---------------
262,138
---------------
COMPUTER SYSTEMS-4.8%
1,265,500 Compaq Computer Corp.(1) 80,676
1,208,000 Hewlett-Packard Co. 74,519
650,000 International Business
Machines Corp. 63,741
656,500 Silicon Graphics, Inc.(1) 9,642
---------------
228,578
---------------
CONSUMER PRODUCTS-4.6%
700,000 Clorox Company 49,000
675,000 Gillette Company 60,117
1,675,000 Procter & Gamble Co. (The) 113,900
---------------
223,017
---------------
DIVERSIFIED COMPANIES-8.9%
2,620,000 General Electric Co. (U.S.) 169,154
700,000 Honeywell Inc. 47,644
4,042,600 Tyco International Ltd. 152,608
1,105,100 Unilever N.V. 58,984
-------------------
428,390
-------------------
ELECTRICAL & ELECTRONIC
COMPONENTS-2.9%
1,060,000 Intel Corp. 81,653
540,000 Texas Instruments Inc. 57,611
-------------------
139,264
-------------------
ENERGY (PRODUCTION & MARKETING)-3.2%
585,000 Coastal Corp. (The) 35,173
1,500,000 Royal Dutch Petroleum Co. 78,938
340,000 Total-Cie Franc Des ORD 37,600
-------------------
151,711
-------------------
ENERGY (SERVICES)-6.3%
950,000 BJ Services Co.(1) 80,512
1,000,000 Diamond Offshore Drilling, Inc. 62,250
1,092,800 Falcon Drilling Co. Inc.(1) 39,751
850,000 Halliburton Co. 50,681
780,000 Schlumberger Ltd. 68,250
-------------------
301,444
-------------------
SEE NOTES TO FINANCIAL STATEMENTS
8 SELECT AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
SELECT
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
FINANCIAL SERVICES-5.4%
320,000 American Express Credit Corp. $ 24,960
1,270,000 Federal Home Loan
Mortgage Corporation 48,101
1,500,000 Federal National
Mortgage Association 72,656
325,000 SLM Holding Corp. 45,622
955,000 Travelers Group, Inc. 66,850
------------------
258,189
------------------
FOOD & BEVERAGE-5.9%
1,850,000 Coca-Cola Company (The) 104,525
1,129,800 ConAgra, Inc. 34,035
525,000 Heinz (H.J.) Co. 24,379
446,000 Hershey Foods Corp. 24,642
1,925,000 PepsiCo, Inc. 70,864
520,000 Sara Lee Corp. 26,585
-------------------
285,030
-------------------
HEALTHCARE-1.6%
700,000 Baxter International, Inc. 32,375
600,000 Cardinal Health, Inc. 44,550
-------------------
76,925
-------------------
INSURANCE-4.4%
360,000 Aetna Life and Casualty Co. 25,583
775,000 Allstate Corp. 64,276
975,000 American International
Group, Inc. 99,511
500,000 UNUM Corp. 24,375
-------------------
213,745
-------------------
LEISURE-2.2%
1,050,000 Carnival Corp. Cl A 50,925
650,000 Disney (Walt) Co. 53,463
-------------------
104,388
-------------------
MACHINERY & EQUIPMENT-0.6%
550,000 Deere & Co. 28,944
-------------------
MEDICAL EQUIPMENT & SUPPLIES-1.1%
1,200,000 Medtronic, Inc. 52,200
-------------------
OFFICE EQUIPMENT & SUPPLIES-0.6%
375,000 Xerox Corp. 29,742
--------------------
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS-1.5%
800,000 Fort James Corporation $ 31,750
400,000 Kimberly-Clark Corp. 20,775
310,000 Mead Corp. (The) 18,755
------------------
71,280
------------------
PHARMACEUTICALS-12.4%
1,025,000 Abbott Laboratories 62,845
990,000 Bristol-Myers Squibb Co. 86,873
1,100,000 Johnson & Johnson 63,113
1,950,000 Lilly (Eli) & Co. 130,406
970,000 Merck & Co., Inc. 86,572
1,100,000 Pfizer, Inc. 77,825
625,000 Warner-Lambert Co. 89,492
------------------
597,126
------------------
RESTAURANTS-0.4%
400,000 McDonald's Corp. 17,925
------------------
RETAIL (APPAREL)-0.7%
1,212,000 TJX Companies,
Inc. (The) 35,905
------------------
RETAIL (FOOD & DRUG)-0.4%
525,000 SYSCO Corp. 21,000
------------------
RETAIL (GENERAL MERCHANDISE)-2.8%
520,000 Dayton Hudson Corp. 32,663
625,000 Nordstrom, Inc. 38,203
1,840,000 Wal-Mart Stores, Inc. 64,630
-------------------
135,496
-------------------
RETAIL (SPECIALTY)-0.9%
787,500 Home Depot, Inc. 43,805
-------------------
TOBACCO-0.7%
805,000 Philip Morris
Companies Inc. 31,898
--------------------
TOTAL COMMON STOCKS-96.5% 4,641,222
--------------------
(Cost $3,511,740)
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT SELECT 9
SCHEDULE OF INVESTMENTS
SELECT
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS
$35,000 par value FHLMC Discount Notes,
5.47%, 11/5/97(2) $ 34,989
$25,000 par value FNMA Discount Notes,
5.48%, 11/12/97(2) 24,966
Repurchase Agreement, BA Security
Services, Inc., (U.S. Treasury obligations),
in a joint trading account at 5.65%,
dated 10/31/97, due 11/3/97
(Delivery value $7,704) 7,700
Repurchase Agreement, J.P. Morgan
Securities, Inc., (U.S. Treasury obligations),
in a joint trading account at 5.66%,
dated 10/31/97, due 11/3/97
(Delivery value $101,248) 101,200
---------------
TOTAL
TEMPORARY
CASH INVESTMENTS--3.5% 168,855
----------------
(Cost $168,837)
TOTAL INVESTMENT SECURITIES--100.0% $ 4,810,077
=================
(Cost $3,680,577)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contract Settlement Unrealized
to Sell Date Value Loss
- --------------------------------------------------------------------------------
176,820,400 FRF 11/28/97 $30,597 (160)
============== =================
(Value on Settlement Date $30,757)
NOTES TO SCHEDULE OF INVESTMENTS
ADR = AMERICAN DEPOSITARY RECEIPT
FHLMC = FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA = FEDERAL NATIONAL MORTGAGE ASSOCIATION
FRF = FRENCH FRANC
ORD = FOREIGN ORDINARY SHARE
(1) NON-INCOME PRODUCING.
(2) RATE DISCLOSED IS THE YIELD TO MATURITY AT PURCHASE.
SEE NOTES TO FINANCIAL STATEMENTS
10 SELECT AMERICAN CENTURY INVESTMENTS
HERITAGE
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND
- --------------------------------------------------------------------------------
INVESTOR CLASS (inception 11/10/87)
Heritage ........ 23.63% 29.56% 20.09% 17.10% 16.90%
S&P MidCap 400 .. 24.13% 32.67% 23.57% 18.61% 19.91%(2)
- --------------------------------------------------------------------------------
ADVISOR CLASS (inception 7/11/97)
Heritage ............................................................. 4.36%
S&P MidCap 400 ....................................................... 1.02%(3)
- --------------------------------------------------------------------------------
INSTITUTIONAL CLASS (inception 6/16/97)
Heritage ............................................................. 9.34%
S&P MidCap 400 ....................................................... 10.98%(4)
- ----------
(1) RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
(2) RETURN FROM 11/30/87 (THE DATE NEAREST TO THE CLASS'S INCEPTION DATE FOR
WHICH DATA ARE AVAILABLE) TO 10/31/97.
(3) RETURN FROM 7/31/97 (THE DATE NEAREST TO THE CLASS'S INCEPTION DATE FOR
WHICH DATA ARE AVAILABLE) TO 10/31/97.
(4) RETURN FROM 6/30/97 (THE DATE NEAREST TO THE CLASS'S INCEPTION DATE FOR
WHICH DATA ARE AVAILABLE) TO 10/31/97.
See pages 45, 46 and 47 for more information about share classes, comparative
indices and returns.
[mountain chart - data below]
VALUE ON 10/31/97:
$48,041 HERITAGE INVESTORS
$53,156 S & P 500 INDEX
$60,520 S & P 400 INDEX
DATE ACCT VALUE RETURN ACCT VALUE RETURN ACCT VALUE RETURN
HERITAGE INVESTORS S & P 500 INDEX S & P 400 INDEX
Nov 30, 87 10000 10000 10000
Oct 31, 88 12730 0.273 12555 0.2555 12765 0.2765
Oct 31, 89 16888 0.6888 15853 0.5853 16672 0.6672
Oct 31, 90 14925 0.4925 14662 0.4662 14439 0.4439
Oct 31, 91 19889 0.9889 19573 0.9573 23600 1.36
Oct 31, 92 21808 1.1808 21517 1.1517 25776 1.5776
Oct 31, 93 28057 1.8057 24720 1.472 31326 2.1326
Oct 31, 94 27739 1.7739 25676 1.5676 32071 2.2071
Oct 31, 95 33575 2.3575 32444 2.2444 38874 2.8874
Oct 31, 96 37081 2.7081 40239 3.0239 45619 3.5619
Oct 31, 97 48041 3.8041 53156 4.3156 60520 5.052
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. Data quoted is for Investor Class only; performance for other
classes will vary due to differences in fee structures (see the Total Returns
table above). The graph begins on 11/30/87, the date closest to the fund's
inception date for which index data are available.
The line representing Heritage's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the total
return lines of the indices do not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Companies 93 92
Median Price/Earnings Ratio 22.5 21.4
Portfolio Turnover 69% 122%
Expense Ratio 1.00% 0.99%
ANNUAL REPORT HERITAGE 11
HERITAGE
MANAGEMENT Q&A
An interview with Nancy Prial, a portfolio manager on the Heritage
investment team. Note: all fund returns referenced in this interview are for
investor class shares.
How did Heritage perform?
Heritage posted a 29.56% total return for the year ended October 31, 1997,
the fund's highest annual return for a fiscal year since 1991. The fund's return
slightly trailed the 32.67% return of its benchmark, the S&P MidCap 400.
The fund posted a modest 4.80% return for the first half of the fiscal year,
but nearly quintupled that return in the latter half. Its weighting in small-cap
companies proved to be a benefit when investors turned to smaller, more
aggressive companies that reported strong second quarter profits. Performance
was further boosted by the fund's significant stake in several computer software
and computer services companies that performed particularly well in the third
quarter.
What stocks added most to returns during the period?
The fund's top performers were also its largest holdings at the end of
October. These companies included Nokia Corp., Conseco, Inc. and Tosco Corp.,
all of which are leading companies in industries that demonstrated strong growth
during the year.
Nokia is the worldwide leader in cellular phone sales and wireless data
devices. The company's stock benefited from robust industry growth that was
driven by increasing consumer demand for cellular products and services. Nokia
was successful in gaining market share in both handset and wireless phone
network sales, and its profit margins have risen steadily over the last year.
[HERITAGE BAR CHART - data below]
HERITAGE'S ONE-YEAR RETURNS OVER 10 YEARS (Periods ended October 31)
HERITAGE S&P MIDCAP 400
10/88 27.30% 27.65%
10/89 32.65% 30.61%
10/90 -11.62% -13.40%
10/91 33.25% 63.45%
10/92 9.65% 9.22%
10/93 28.64% 21.53%
10/94 -1.13% 2.38%
10/95 21.04% 21.21%
10/96 10.44% 17.35%
10/97 29.56% 32.67%
This chart illustrates the fund's returns since its inception and compares them
with the index's returns. Heritage's total returns include operating expenses,
while the S&P MidCap 400's returns do not. See page 46 for a description of the
index. Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
(1) Investor Class.
(2) Returns from 11/30/87 (the date nearest to the fund's inception date for
which data are available) to 10/31/88.
12 HERITAGE AMERICAN CENTURY INVESTMENTS
HERITAGE
Another good performer was Conseco, a holding company that acquires and
operates life insurance companies. Since mid-1996, the company has established
itself as the largest U.S. provider of long-term healthcare coverage through its
acquisition of several insurance companies. In September, Conseco purchased
Colonial Penn Life, a move that heightens the company's presence in the senior
marketplace and expands its distribution network. This stock was very
inexpensive when we bought it, relative both to the market and to its peers, and
its growth during the period enhanced returns.
Tosco, a large refiner/wholesaler and retail marketer of petroleum products,
enjoyed robust gains due to consumer demand for oil and gas. In addition to
reaping those industry-wide benefits, this well-managed company has been
aggressively acquiring oil-refining and marketing companies and has nearly
doubled in size during the last year. We expect Tosco to continue displaying a
healthy rate of growth and performance due to such factors as rising energy
consumption, the use of more cost-effective drilling technology and continued
consolidation within the industry.
Which stocks negatively affected the fund's performance?
Fila Holdings, an Italian sportswear retailer, has continued to be somewhat
disappointing. This company and the athletic footwear business in general have
suffered as consumer preferences in casual footwear have shifted away from
basketball shoes to the workboot-style footwear that the industry calls "brown
shoes." We held onto the stock because, despite Fila's difficulties in the U.S.,
it is still doing well internationally. The company currently is restructuring
its U.S. operations, which we anticipate will offer a measure of stability in
the short-term, and it has announced plans to introduce new products here in
1998. We believe that these two factors will result in accelerated domestic
sales and solid growth going forward.
Eagle Hardware & Garden was also a weak performer during the period. Eagle
operates a successful chain of building supply/home improvement stores that
cater primarily to the do-it-yourself market. Its stores, which are located in
the northwestern United States, are typically larger and carry a broader product
line than those of its competitors. The company has grown rapidly, opening an
average of six new stores each year since it began operations in 1990. However,
Eagle's sales currently lag those of its primary competition, Home Depot,
largely because its stores are located in less populous communities than the
metropolitan areas favored by Home Depot. We are comfortable with the company's
plan to fill out its existing territories and expand into California in 1998,
which we believe will boost its future earnings and revenues.
TOP TEN HOLDINGS % of fund investments
As of As of
10/31/97 4/30/97
Tosco Corp. 2.6% 2.5%
Washington Mutual, Inc. 2.4% 2.5%
Sun Company, Inc. 2.2% -
AmeriSource Health Corp. 2.1% -
Ahmanson (H.F.) & Co. 2.1% 0.9%
SCI Systems, Inc. 2.0% 1.7%
HBO & Co. 2.0% 1.7%
Nokia Corp. CI A ADR 2.0% 2.9%
Autodesk, Inc. 1.8% -
Bay Networks, Inc. 1.8% -
TOP FIVE INDUSTRIES % of fund investments
As of As of
10/31//97 4/30/97
Computer Software & Services 16.0% 9.3%
Energy (Production & Marketing) 10.8% 8.6%
Computer Peripherals 7.5% 5.3%
Electrical & Electronic
Components 6.8% 6.4%
Business Services & Supplies 4.5% 4.9%
ANNUAL REPORT HERITAGE 13
HERITAGE
What changes did you make to the portfolio since the semiannual report?
A significant change occurred in the third quarter, after shareholders
approved increasing the portion of the fund that can be invested in stocks that
do not pay a dividend to 40% from 20%. Many rapidly-growing mid-cap companies do
not pay dividends because they need to plow their earnings back into their
businesses to continue growing in a competitive environment. The new guidelines
give us a much broader selection of stocks to choose from. As a result, about
28% of the fund's assets are currently invested in non-dividend paying stocks,
up from 20% at the end of the previous period. We believe this shift provides
more horsepower to the fund without significantly increasing its volatility.
Were there any changes to heritage's management team?
Kevin Lewis, who has helped manage the fund since 1995, accepted another
assignment within American Century in June, but the team has not decreased in
size. We added a seasoned analyst, Michael Orndorff, who joined American Century
in 1994. Orndorff previously managed financial research for the company's
international growth funds.
14 HERITAGE AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
HERITAGE
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS & RIGHTS
AEROSPACE & DEFENSE-1.6%
415,000 AAR CORP. $ 14,862
100,000 Precision Castparts Corp. 5,881
-----------------
20,743
-----------------
AGRICULTURE-1.0%
360,000 DEKALB Genetics Corp. 12,915
-----------------
AUTOMOBILES & AUTO PARTS-1.1%
505,000 Wabash National Corp. 15,087
-----------------
BANKING-5.8%
460,000 Ahmanson (H.F.) & Co. 27,140
590,000 North Fork
Bancorporation, Inc. 17,368
465,000 Washington Mutual, Inc. 31,809
-----------------
76,317
-----------------
BIOTECHNOLOGY-0.8%
220,000 Agouron Pharmaceuticals, Inc.(1) 10,024
------------------
BUILDING & HOME IMPROVEMENTS-2.7%
930,000 Apogee Enterprises, Inc. 22,029
479,100 Interface, Inc. 13,774
------------------
35,803
------------------
BUSINESS SERVICES & SUPPLIES-4.5%
200,000 National Computer Systems, Inc. 7,525
570,000 Norrell Corp. 16,601
1,025,000 Reynolds & Reynolds Co. 17,553
530,000 SITEL Corp.(1) 4,704
450,000 Valassis Communications, Inc.(1) 13,275
-------------------
59,658
-------------------
COMMUNICATIONS EQUIPMENT-3.4%
220,000 ADC Telecommunications, Inc.(1) 7,301
300,000 Nokia Corp. Cl A ADR 26,475
385,000 Premisys Communications, Inc.(1) 10,467
-------------------
44,243
-------------------
COMPUTER PERIPHERALS-7.5%
750,000 Bay Networks, Inc.(1) 23,719
603,000 BMC Industries, Inc. 19,409
640,000 Network General Corp.(1) 12,920
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
615,000 SCI Systems, Inc.(1) $ 27,060
540,000 Telxon Corp.(1) 13,922
65,800 Zero Corp. 1,768
-------------------
98,798
-------------------
COMPUTER SOFTWARE & SERVICES-15.9%
200,000 Analysts International Corp. 9,000
650,000 Autodesk, Inc. 24,009
565,000 BDM International Inc.(1) 12,465
275,000 Cap Gemini N.V. ORD 8,540
870,000 Cerner Corp.(1) 21,043
450,000 Comdisco, Inc. 14,203
460,000 Getronics N.V. ORD 15,135
620,000 HBO & Co. 26,931
400,000 Henry (Jack) & Associates, Inc. 10,250
540,000 InaCom Corp.(1)(2) 16,639
350,000 Lernout & Hauspie
Speech Products N.V.(1) 17,063
1,250,000 MicroProse, Inc.(1) 8,203
348,300 Netscape Communications Corp.(1) 11,439
492,500 Technology Solutions Co.(1) 15,452
------------------
210,372
------------------
CONSUMER PRODUCTS-1.5%
299,300 Fila Holding S.p.A. ADR 7,520
512,000 Herbalife International, Inc. 12,768
-------------------
20,288
-------------------
CONTROL & MEASUREMENT-1.4%
320,000 Tektronix, Inc. 18,920
-------------------
ELECTRICAL & ELECTRONIC
COMPONENTS-6.7%
460,000 AVX Technology 12,995
132,100 C&D Technologies, Inc. 5,812
290,000 Cohu, Inc. 10,857
306,500 Kuhlman Corp. 10,689
319,579 LSI Logic Corp.(1) 6,971
800,000 Methode Electronics, Inc. 15,700
400,000 Oak Technology, Inc.(1) 3,863
407,200 Pioneer
Standard Electronics, Inc. 6,744
170,000 Raychem Corp. 15,396
------------------
89,027
------------------
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT HERITAGE 15
SCHEDULE OF INVESTMENTS
HERITAGE
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
ENERGY (PRODUCTION & MARKETING)-10.8%
300,000 Camco International, Inc. $ 21,675
800,000 Lomak Petroleum, Inc. 14,850
495,000 Newpark Resources, Inc.(1) 20,543
300,000 Pennzoil Co. 22,200
715,000 Sun Company, Inc. 28,644
1,045,000 Tosco Corp. 34,485
------------------
142,397
------------------
FINANCIAL SERVICES-1.3%
300,000 State Street Boston Corp. 16,725
------------------
FOOD & BEVERAGE-3.0%
231,000 Canandaigua Brands, Inc. Cl A(1) 11,507
440,000 Earthgrains Company 18,095
330,000 International Multifoods Corp. 9,735
------------------
39,337
------------------
INSURANCE-0.9%
200,000 Conseco Inc. 8,725
150,000 PAULA Financial(1) 3,769
------------------
12,494
------------------
LEISURE-2.5%
143,000 Anchor Gaming(1) 11,226
590,000 International Game Technology 15,082
250,000 WMS Industries Inc.(1) 6,078
------------------
32,386
------------------
MACHINERY & EQUIPMENT-3.1%
305,000 Cincinnati Milacron Inc. 8,463
449,200 DT Industries, Inc. 13,364
450,000 General Scanning Inc.(1) 11,616
155,000 Kennametal Inc. 7,518
------------------
40,961
------------------
MEDICAL EQUIPMENT & SUPPLIES-3.1%
290,000 Advanced Technology
Laboratories, Inc.(1) 12,361
475,000 AmeriSource Health Corp.(1) 28,203
------------------
40,564
------------------
METALS & MINING-1.9%
560,000 General Cable Corp. 18,130
210,000 Getchell Gold Corp.(1) 7,560
------------------
25,690
------------------
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES-0.9%
425,000 IKON Office Solutions Inc. $ 12,033
-------------------
PERSONAL SERVICES-0.8%
425,000 Loewen Group Inc. 10,519
-------------------
PHARMACEUTICALS-3.9%
325,000 ALPHARMA INC. 7,170
18,283 ALPHARMA INC. Rights(1) 103
875,000 Mylan Laboratories 19,195
500,000 Omnicare, Inc. 13,906
225,000 Teva Pharmaceutical
Industries Ltd. ADR 10,512
---------------------
50,886
---------------------
RESTAURANTS-0.7%
500,000 Bob Evans Farms, Inc. 9,438
-------------------
RETAIL (APPAREL)-2.9%
405,000 American Eagle
Outfitters, Inc.(1) 11,796
120,000 Gucci Group N.V. 4,365
435,000 Liz Claiborne, Inc. 22,049
---------------------
38,210
---------------------
RETAIL (SPECIALTY)-2.2%
620,000 Eagle Hardware
& Garden, Inc.(1) 10,559
1,025,000 Food Lion, Inc. Cl A 8,008
774,700 Heilig-Meyers Co. 10,362
---------------------
28,929
---------------------
TEXTILES & APPAREL-1.0%
391,400 Kellwood Co. 13,528
---------------------
TRANSPORTATION-2.1%
365,000 Budget Group Inc.(1) 12,775
410,000 Expeditors International
of Washington, Inc. 14,939
---------------------
27,714
---------------------
TOTAL COMMON STOCKS & RIGHTS-95.0% 1,254,006
---------------------
(Cost $982,154)
PREFERRED STOCKS-0.8%
COMPUTER SOFTWARE & SERVICES
275,000 Vanstar Financing Trust
(Acquired 9/27/96
through 6/17/97)(3) 11,000
---------------------
(Cost $12,949)
SEE NOTES TO FINANCIAL STATEMENTS
16 HERITAGE AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
HERITAGE
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS
COMPUTER PERIPHERALS-0.5%
$7,000,000 C-Cube Microsystems, Inc.,
5.875%, 11/1/05 $ 6,873
------------------------
ELECTRICAL & ELECTRONIC
COMPONENTS-0.6%
7,500,000 VLSI Technology, Inc.,
8.25%, 10/1/05 7,584
------------------------
MEDICAL EQUIPMENT & SUPPLIES-0.8%
10,000,000 Heartport, Inc., 7.25%,
5/1/04 (Acquired 4/15/97,
Cost $10,000)(3) 10,613
------------------------
TOTAL CONVERTIBLE BONDS-1.9% 25,070
------------------------
(Cost $25,890)
TEMPORARY CASH INVESTMENTS
$8,500 par value FHLB Discount Note,
5.50%, 11/3/97(4) 8,500
Repurchase Agreement, Merrill Lynch
& Co., Inc.,
(U.S. Treasury obligations),
in a joint
trading account at 5.60%,
dated 10/31/97, due 11/3/97
(Delivery value $21,610) 21,600
------------------------
TOTAL TEMPORARY
CASH INVESTMENTS-2.3% 30,100
------------------------
(Cost $30,097)
TOTAL INVESTMENT SECURITIES--100.0% $1,320,176
=========================
(Cost $1,051,090)
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contract Settlement Unrealized
to Sell Date Value Loss
- --------------------------------------------------------------------------------
37,408,000 NLG 11/28/97 $19,229 $(48)
============= ==========
(Value on Settlement Date $19,277)
NOTES TO SCHEDULE OF INVESTMENTS
ADR = AMERICAN DEPOSITARY RECEIPT
FHLB = FEDERAL HOME LOAN BANK
ORD = FOREIGN ORDINARY SHARE
NLG = NETHERLANDS GUILDER
(1) Non-income producing.
(2) Affiliated company: represents ownership of at least 5% of the voting
securities of the issuer and is, therefore, an affiliate as defined in the
investment company act of 1940. (see note 5 in notes to financial
statements for a summary of transactions for each issuer which is or was
an affiliate at or during the year ended october 31, 1997.)
(3) Security was purchased under rule 144a of the securities act of 1933 and,
unless registered under the act or exempted from registration, may only be
sold to qualified institutional investors. the aggregate value of
restricted securities at october 31, 1997, was $21,613, which represented
1.6% of net assets.
(4) Rate disclosed is the yield to maturity at purchase.
See Notes to Financial Statements
ANNUAL REPORT HERITAGE 17
GROWTH
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS LIFE OF FUND
- --------------------------------------------------------------------------------
INVESTOR CLASS (inception 6/30/71)(2)
Growth .... 21.61% 27.85% 19.15% 13.50% 15.34% 18.49%
S&P 500 ... 15.14% 32.10% 27.45% 19.82% 17.13% 12.97%
- --------------------------------------------------------------------------------
ADVISOR CLASS (inception 6/4/97)
Growth ................................................................. 14.29%
S&P 500 ................................................................ 9.81%
- --------------------------------------------------------------------------------
INSTITUTIONAL CLASS (inception 6/16/97)
Growth ................................................................. 8.27%
S&P 500 ................................................................ 3.20%
- ----------
(1) RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
(2) THIS INCEPTION DATE CORRESPONDS WITH THE MANAGEMENT COMPANY'S
IMPLEMENTATION OF ITS CURRENT INVESTMENT PHILOSOPHY AND PRACTICES.
See pages 45, 46 and 47 for more information about share classes, the
comparative indices and returns.
[mountain chart - data below]
VALUE ON 10/31/97:
GROWTH $429,552
S&P 500 $211,523
DATE ACCT VALUE RETURN ACCT VALUE RETURN
GROWTH S & P 500
Oct 31, 77 10000 - 10000 -
Oct 31, 78 13901 0.3901 10629 0.0629
Oct 31, 79 21871 1.1871 12256 0.2256
Oct 31, 80 45222 3.5222 16192 0.6192
Oct 31, 81 50086 4.0086 16281 0.6281
Oct 31, 82 48691 3.8691 18939 0.8939
Oct 31, 83 65694 5.5694 24220 1.422
Oct 31, 84 58074 4.8074 25746 1.5746
Oct 31, 85 67745 5.7745 30726 2.0726
Oct 31, 86 94234 8.4234 40911 3.0911
Oct 31, 87 103020 9.302 43506 3.3506
Oct 31, 88 106300 9.63 49960 3.996
Oct 31, 89 151736 14.1736 63084 5.3084
Oct 31, 90 133946 12.3946 58342 4.8342
Oct 31, 91 215176 20.5176 77886 6.7886
Oct 31, 92 228021 21.8021 85621 7.5621
Oct 31, 93 247365 23.7365 98366 8.8366
Oct 31, 94 253933 24.3933 102173 9.2173
Oct 31, 95 310584 30.0584 129103 11.9103
Oct 31, 96 335984 32.5984 160123 15.0123
Oct 31, 97 429552 41.9552 211523 20.1523
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. Data quoted is for Investor Class only; performance for other
classes will vary due to differences in fee structures (see the Total Returns
table above).
The line representing Growth's total return includes operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
return line of the S&P 500 does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Companies 65 64
Median Price/Earnings Ratio 25.7% 25.9
Portfolio Turnover 75% 122%
Expense Ratio 1.00% 1.00%
18 GROWTH AMERICAN CENTURY INVESTMENTS
GROWTH
MANAGEMENT Q&A
An interview with John Sykora, portfolio manager on the Growth investment
team. Note: All fund returns referenced in this interview are for Investor Class
shares.
HOW DID GROWTH PERFORM?
For the year ended October 31, 1997, Growth performed well in absolute
terms, returning 27.85%. This is the fund's highest annual return for a fiscal
year since 1991. The fund benefited from the bull market's continued run and
investors' preference for the stocks of larger companies, which prospered in an
environment of low interest rates, low inflation and a strong dollar.
In comparative terms, Growth's performance trailed that of its benchmark,
the S&P 500, which posted a 32.10% gain for the 12-month period. However, the
fund's 27.33% calendar year-to-date return (as of October 31, 1997) outpaced the
S&P 500's gain of 25.11% for the same period. The fund's underperformance for
the fiscal year occured in the last two months of calendar year 1996, when
investors became concerned that interest rates would rise and that the economy
would slow. The stocks of many faster-growing firms suffered as investors sold
shares that had performed strongly and retreated to more defensive positions.
Many holdings that hurt fund returns in late 1996 have strongly outperformed the
market this year, affirming our commitment to stocks with strong earnings
growth.
Several other factors contributed significantly to the fund's solid
performance during 1997. Over the course of the last 18 months, we reduced the
number of holdings in the portfolio from more than 100 to approximately 60, and
we have added more investment analysts to the management team. These additional
resources have enabled us to expand the depth and breadth of research performed
on each company whose stock we hold. By concentrating on fewer companies, we can
better understand what drives
[GROWTH BAR CHART - data below]
GROWTH'S ONE-YEAR RETURNS OVER 10 YEARS (Periods ended October 31)
GROWTH S&P 500
10/88 3.18% 14.83%
10/89 42.74% 26.27%
10/90 -11.72% -7.52%
10/91 60.64% 33.50%
10/92 5.96% 9.93%
10/93 8.48% 14.89%
10/94 2.66% 3.87%
10/95 22.31% 26.36%
10/96 8.18% 24.03%
10/97 27.85% 32.10%
This chart illustrates the fund's returns over the past 10 years and compares
them with the S&P 500's returns. Growth's total returns include operating
expenses, while the S&P 500's returns do not. See page 46 for a description of
the index. Past performance is no guarantee of future results. Investment return
and principal value will fluctuate, and redemption value may be more or less
than original cost.
* Investor Class.
ANNUAL REPORT GROWTH 19
GROWTH
their performance and feel comfortable taking larger positions in companies we
think have strong future prospects. The fund's portfolio remains
well-diversified, and we believe these more concentrated positions will improve
performance.
What stocks added most to returns during the period?
The fund's substantial stake in technology helped performance greatly.
Although the technology sector was volatile, many companies enjoyed robust
growth as corporations and consumers continued to demand computer equipment. In
addition to the second-half gains provided by Newbridge Networks and Tellabs
Inc., which also were two of the fund's strongest performers in the first half
of the fiscal year, returns were boosted by the fund's stakes in Compaq Computer
Corp. and Compuware Corp. Compaq recently implemented a new built-to-order
framework that will improve profitability by reducing the company's inventory
cycle. Compuware's successful introduction of new client-server tools boosted
its stock.
Drug manufacturer Eli Lilly and insurance giant Allstate Corp. were also two
of the fund's top performers this year. New product releases, including a
cholesterol-reducing drug and a medication for treating schizophrenia, helped
lift Lilly's profits nearly 30% in the third quarter alone. Allstate's stock has
continued to perform well, attributable in part to a share buy-back program and
the implementation of a sophisticated claims processing system that has helped
the company increase efficiency and trim its ratio of paid claims to premiums.
What stocks disappointed you?
Two of the fund's worst performers were punished by the market for their
failure to meet earnings expectations. In each case, the problems were company
specific. Oxford Health Plans is a rapidly-growing managed-care company that we
purchased in early 1997. We were impressed with Oxford's rapid growth, which was
driven by its ability to effectively control health care costs and strong
enrollment in its insured healthcare plans. That changed abruptly in the third
quarter. Oxford developed serious internal control problems when it attempted to
implement a new billing and bookkeeping information system. The company's
unexpected announcement of poor third-quarter earnings unfortunately coincided
with the market's October correction, and its share price dropped significantly.
The stock of Boston Scientific, a manufacturer and marketer of medical
equipment, also fell about 15% when the company announced poor earnings. The
shortfall resulted from a slowdown in orders and disappointing sales in foreign
markets, which contribute nearly half of the company's revenue.
TOP TEN HOLDINGS % of fund investments
As of As of
10/31/97 4/30/97
Eli Lilly & Co. 4.5% 3.9%
Compuware Corp. 4.3% 3.4%
Newbridge Networks Corp. 4.2% 3.1%
Conseco Inc. 3.5% 3.8%
Allstate Corp. 3.5% 3.1%
Worldcom Inc. 3.3% 2.6%
Tyco International Ltd. 3.1% 0.2%
Xerox Corp. 3.0% 2.2%
Compaq Computer Corp. 3.0% 2.2%
Bristol-Myers Squibb Co. 2.8% -
TOP FIVE INDUSTRIES % of fund investments
As of As of
10/31/97 4/30/97
Insurance 9.6% 9.6%
Computer Software & Services 9.1% 10.7%
Pharmaceuticals 8.5% 9.2%
Communications Services 8.4% 3.5%
Communications Equipment 8.2% 12.4%
20 GROWTH AMERICAN CENTURY INVESTMENTS
GROWTH
What other significant changes did you make to the portfolio since the
semiannual report?
The fund's weighting in telecommunications stocks decreased. We saw slowing
growth among companies that provide equipment while growth accelerated among
those that provide services. We reduced the fund's holdings in
telecommunications equipment providers from 10% of the portfolio at the end of
April to about 4% at October 31. We more than doubled our position in service
providers over the same period.
Other meaningful changes included an increase in the fund's weighting in
consumer staples and media stocks, due to healthy growth in both those areas. We
maintained meaningful positions in financial and pharmaceutical companies
because they continue to meet our criteria for accelerating earnings and
revenues.
Were there changes to Growth's management team?
Portfolio manager Kim Goodwin joined the Growth team in October. Kim brings
ten years of investment experience, most recently as portfolio manager on Putnam
Investments' mid-cap Vista fund and large-cap U.S. Growth fund. As part of our
effort to deepen our research efforts, we have also recently welcomed investment
analysts Ken Crawford and Greg Woodhams to the Growth team. Ken has been an
investment analyst on the Select investment team since 1995. Greg previously was
director of equity research at Texas Commerce Bank.
What is your outlook for the fund?
In addition to benefits provided by these management changes, we expect
Growth's performance to continue to be helped by our concerted effort to
increase the fund's holdings in larger-cap companies across a more diverse range
of sectors and industries.
ANNUAL REPORT GROWTH 21
SCHEDULE OF INVESTMENTS
GROWTH
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS
AGRICULTURE-0.4%
200,000 Pioneer Hi-Bred
International, Inc. $ 18,325
----------------------
BANKING-7.0%
2,299,960 Banc One Corp. 119,885
150,000 Chase Manhattan Corp. 17,306
700,000 Citicorp 87,544
1,500,000 First Union Corp. 73,594
1,700,000 Norwest Corp. 54,506
------------------
352,835
------------------
BROADCASTING & MEDIA-0.5%
400,000 Grupo Televisa S.A. GDR(1) 12,400
500,000 Westinghouse Electric Corp. 13,219
------------------
25,619
------------------
BUSINESS SERVICES & SUPPLIES-2.0%
1,200,000 Ceridian Corp.(1) 46,875
1,415,600 U.S. Filter Corp.(1) 56,801
------------------
103,676
------------------
CHEMICALS & RESINS-0.8%
500,000 Potash Corp. of
Saskatchewan Inc. 40,969
------------------
COMMUNICATIONS EQUIPMENT-8.2%
1,600,000 Ericsson (L.M.)
Telephone Co. ADR 70,900
700,000 Lucent Technologies Inc. 57,706
3,975,000 Newbridge Networks Corp.(1) 210,675
852,000 Nokia Corp. Cl A ADR 75,189
-------------------
414,470
-------------------
COMMUNICATIONS SERVICES-8.4%
2,400,000 Airtouch Communications,
Inc.(1) 92,700
800,000 Bell Atlantic Corp. 63,900
1,600,000 SBC Communications Inc. 101,800
4,882,500 Worldcom, Inc.(1) 164,021
--------------------
422,421
--------------------
COMPUTER PERIPHERALS-2.1%
800,000 3Com Corp.(1) 33,175
900,000 Cisco Systems Inc.(1) 73,828
--------------------
107,003
--------------------
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE & SERVICES-9.1%
3,300,000 Compuware Corp.(1) $ 217,800
1,900,000 Concord EFS, Inc.(1) 56,406
850,000 First Data Corp. 24,703
400,000 Microsoft Corp.(1) 51,975
1,575,000 Oracle Systems Corp.(1) 56,356
2,150,000 SunGard Data Systems Inc.(1) 50,794
--------------------
458,034
--------------------
COMPUTER SYSTEMS-6.1%
2,350,000 Compaq Computer Corp.(1) 149,813
1,375,000 Digital Equipment Corp.(1) 68,836
900,000 International Business
Machines Corp. 88,256
-----------------
306,905
-----------------
CONSUMER PRODUCTS-5.4%
2,000,000 Avon Products, Inc. 131,000
825,000 Gillette Company 73,477
1,000,000 Procter & Gamble Co. (The) 68,000
-----------------
272,477
-----------------
DIVERSIFIED COMPANIES-4.9%
1,400,000 General Electric Co. (U.S.) 90,387
4,147,724 Tyco International Ltd. 156,577
-------------------
246,964
-------------------
ELECTRICAL & ELECTRONIC
COMPONENTS-5.7%
500,000 Intel Corp. 38,516
1,150,000 Microchip Technology
Inc.(1) 45,641
1,200,000 Siemens AG ORD 73,745
1,201,000 Texas Instruments Inc. 128,131
-------------------
286,033
-------------------
ENERGY (PRODUCTION & MARKETING)-1.6%
200,000 Amoco Corp. 18,338
403,314 British Petroleum
Co. plc ADR 35,390
350,000 Chevron Corp. 29,028
-------------------
82,756
-------------------
ENERGY (SERVICES)-0.3%
200,000 Schlumberger Ltd. 17,500
-------------------
SEE NOTES TO FINANCIAL STATEMENTS
22 GROWTH AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
GROWTH
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
FINANCIAL SERVICES-4.3%
2,200,000 Federal National
Mortgage Association $ 106,563
1,550,000 Travelers Group, Inc. 108,500
----------------
215,063
----------------
HEALTHCARE-0.6%
675,000 Oxford Health Plans, Inc.(1) 17,445
278,700 United HealthCare Corp. 12,907
----------------
30,352
----------------
INSURANCE-9.6%
875,000 Ace, Ltd. 81,320
2,100,000 Allstate Corp. 174,169
525,000 American International
Group, Inc. 53,583
4,063,000 Conseco Inc. 177,248
----------------
486,320
----------------
MACHINERY & EQUIPMENT-2.0%
600,000 Applied Materials, Inc.(1) 20,006
1,000,000 Sandvik AB Cl A ORD(1) 30,242
950,000 Sundstrand Corp. 51,656
---------------
101,904
---------------
MEDICAL EQUIPMENT & SUPPLIES-0.5%
450,000 Guidant Corp. 25,875
--------------
OFFICE EQUIPMENT & SUPPLIES-3.0%
1,900,000 Xerox Corp. 150,694
--------------
PHARMACEUTICALS-8.5%
1,600,000 Bristol-Myers Squibb Co. 140,400
3,400,000 Lilly (Eli) & Co. 227,375
600,000 Merck & Co., Inc. 53,550
200,000 SmithKline Beecham plc ADR 9,525
-------------
430,850
--------------
RETAIL (FOOD & DRUG)-1.5%
1,200,000 CVS Corp. 73,575
--------------
RETAIL (SPECIALTY)-4.0%
3,000,000 CompUSA Inc.(1) 98,250
1,875,000 Home Depot, Inc. 104,297
--------------
202,547
--------------
Shares/Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
TOBACCO-1.5%
1,850,000 Philip Morris Companies Inc. $ 73,306
--------------
TOTAL COMMON STOCKS-98.0% 4,946,473
--------------
(Cost $3,426,062)
PREFERRED STOCKS-0.3%
PRINTING & PUBLISHING
900,000 News Corp. Ltd. ADR 15,975
--------------
(Cost $16,362)
TEMPORARY CASH INVESTMENTS
$50,000 par value FHLMC Discount Notes,
5.42%, 11/6/97(2) 49,977
Repurchase Agreement, BA Security
Services, Inc., (U.S. Treasury obligations),
in a joint trading account at 5.65%,
dated 10/31/97, due 11/3/97
(Delivery value $34,316) 34,300
--------------
TOTAL
TEMPORARY
CASH INVESTMENTS-1.7% 84,277
--------------
(Cost $84,262)
TOTAL INVESTMENT SECURITIES-100.0% $ 5,046,725
===============
(Cost $3,526,686)
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contract Settlement Unrealized
to Sell Date Value Loss
- --------------------------------------------------------------------------------
110,160,240 DEM 11/28/97 $ 63,895 $(501)
461,541,549 SEK 11/28/97 61,541 (192)
---------------- --------------
$125,436 $(693)
================ ==============
(Value on Settlement Date $126,129)
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT GROWTH 23
SCHEDULE OF INVESTMENTS
GROWTH
NOTES TO SCHEDULE OF INVESTMENTS
ADR = AMERICAN DEPOSITARY RECEIPT
DEM = GERMAN MARK
FHLMC = FEDERAL HOME LOAN MORTGAGE CORPORATION
GDR = GLOBAL DEPOSITARY RECEIPT
ORD = FOREIGN ORDINARY SHARE
SEK = SWEDISH KRONA
(1) Non-income producing.
(2) Rate disclosed is the yield to maturity at purchase.
SEE NOTES TO FINANCIAL STATEMENTS
24 GROWTH AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
SELECT HERITAGE GROWTH
ASSETS (In Thousands)
Investment securities, at value (identified
cost of $3,680,577, $1,051,090 and
$3,526,686, respectively)
<S> <C> <C> <C>
(Note 3 and Note 5) ....................... $ 4,810,077 $ 1,320,176 $ 5,046,725
Cash ...................................... 1,350 1,407 3,279
Receivable for investments
sold ...................................... 68,031 14,368 92,893
Dividends
and interest
receivable ................................ 4,260 1,188 3,460
-------------- -------------- --------------
4,883,718 1,337,139 5,146,357
-------------- -------------- --------------
LIABILITIES
Disbursements in excess of
demand deposit cash ....................... 3,721 891 3,429
Payable for forward foreign
currency exchange contracts ............... 160 48 693
Payable for investments
purchased ................................. 91,017 13,233 13,652
Payable for capital shares
redeemed .................................. 2,387 270 8,844
Accrued management
fees (Note 2) ............................. 4,222 1,182 4,591
-------------- -------------- --------------
101,507 15,624 31,209
-------------- -------------- --------------
Net Assets ................................ $ 4,782,211 $ 1,321,515 $ 5,115,148
============== ============== ==============
NET ASSETS CONSIST OF:
Capital (par value
and paid in surplus) ...................... $ 2,854,365 $ 805,620 $ 2,846,261
Undistributed net
investment income ......................... 18,942 6,439 --
Accumulated undistributed
net realized gain on
investments and foreign
currency transactions ..................... 779,591 240,419 749,514
Net unrealized appreciation
on investments and translation
of assets and liabilities
in foreign currencies (Note 3) ............ 1,129,313 269,037 1,519,373
-------------- -------------- --------------
$ 4,782,211 $ 1,321,515 $ 5,115,148
============== ============== ==============
Investor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ $4,769,436,954 $1,321,266,212 $5,112,776,795
Shares outstanding ........................ 98,986,946 88,901,091 183,512,538
Net asset value
per share ................................. $ 48.18 $ 14.86 $ 27.86
Advisor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ $ 1,288,660 $ 119,646 $ 2,200,224
Shares
outstanding ............................... 26,759 8,055 79,038
Net asset
value per share ........................... $ 48.16 $ 14.85 $ 27.84
Institutional Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ $ 11,485,686 $ 129,109 $ 170,672
Shares
outstanding ............................... 238,088 8,680 6,122
Net asset
value per share ........................... $ 48.24 $ 14.87 $ 27.88
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT STATEMENTS OF ASSETS AND LIABILITIES 25
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31,
1997
SELECT HERITAGE GROWTH
INVESTMENT INCOME (In Thousands)
Income:
<S> <C> <C> <C>
Dividends (net of foreign
taxes withheld of $946, $163,
and $648, respectively) .............. $ 53,832 $ 9,647 $ 41,246
Interest ............................. 5,796 2,943 8,269
----------- ----------- -----------
59,628 12,590 49,515
----------- ----------- -----------
Expenses (Note 2):
Management fees ...................... 44,667 11,960 48,473
Distribution fees and
Shareholder service
fees-Advisor Class ................... 1 -- 1
Directors' fees and
expenses ............................. 44 11 47
----------- ----------- -----------
44,712 11,971 48,521
----------- ----------- -----------
Net investment income ................ 14,916 619 994
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY
(NOTE 3)
Net realized gain (loss) on:
Investments .......................... 782,992 242,672 763,422
Foreign currency
transactions ......................... 6,514 5,977 (3,683)
----------- ----------- -----------
789,506 248,649 759,739
----------- ----------- -----------
Change in net unrealized
appreciation on:
Investments .......................... 270,602 52,463 400,694
Translation of assets and
liabilities in
foreign currencies ................... (536) (190) (666)
----------- ----------- -----------
270,066 52,273 400,028
----------- ----------- -----------
Net realized and unrealized
gain on investments .................. 1,059,572 300,922 1,159,767
----------- ----------- -----------
Net Increase
in Net Assets
Resulting from
Operations ........................... $ 1,074,488 $ 301,541 $ 1,160,761
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
26 STATEMENTS OF OPERATIONS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED OCTOBER 31, 1997
AND OCTOBER 31, 1996
SELECT HERITAGE GROWTH
Increase (Decrease)
in Net Assets 1997 1996 1997 1996 1997 1996
OPERATIONS
($ IN THOUSANDS)
Net investment
<S> <C> <C> <C> <C> <C> <C>
income (loss) ..................... $ 14,916 $ 21,045 $ 619 $ (125) $ 994 $ (3,163)
Net realized gain on
investments and foreign
currency transactions ............. 789,506 364,952 248,649 69,544 759,739 104,580
Change in net unrealized
appreciation on investments
and translation of assets
and liabilities in foreign
currencies ........................ 270,066 324,433 52,273 34,728 400,028 253,622
----------- ----------- ----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations ......... 1,074,488 710,430 301,541 104,147 1,160,761 355,039
----------- ----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Investor
Class ............................. (31,065) (26,725) (8,095) (4,182) (38,510) (14,900)
From net realized gains
from investment transactions:
Investor
Class ............................. (353,996) (462,881) (62,011) (53,228) (51,784) (642,609)
In excess of net realized gain:
Investor
Class ............................. -- -- -- -- -- (16,441)
----------- ----------- ----------- ----------- ----------- -----------
Decrease in net assets
from distributions ................ (385,061) (489,606) (70,106) (57,410) (90,294) (673,950)
----------- ----------- ----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase (decrease)
in net assets from capital
share transactions ................ 54,105 (190,583) 6,929 28,091 (720,743) (45,559)
----------- ----------- ----------- ----------- ----------- -----------
Net increase (decrease)
in net assets ..................... 743,532 30,241 238,364 74,828 349,724 (364,470)
NET ASSETS
Beginning of year ................. 4,038,679 4,008,438 1,083,151 1,008,323 4,765,424 5,129,894
----------- ----------- ----------- ----------- ----------- -----------
End of year ....................... $ 4,782,211 $ 4,038,679 $ 1,321,515 $ 1,083,151 $ 5,115,148 $ 4,765,424
=========== =========== =========== =========== =========== ===========
Undistributed
netinvestment income .............. $ 18,942 $ 28,576 $ 6,439 $ 7,938 $ -- $ 38,410
=========== =========== =========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS 27
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Twentieth Century Select Fund
(Select), American Century - Twentieth Century Heritage Fund (Heritage), and
American Century - Twentieth Century Growth Fund (Growth) (the Funds) are three
of the thirteen series of funds issued by the Corporation. The Funds' investment
objective is to seek capital growth by investing primarily in equity securities.
The Funds are authorized to issue three classes of shares: the Investor Class,
the Advisor Class and the Institutional Class. The three classes of shares
differ principally in their respective shareholder servicing and distribution
expenses and arrangements. All shares of each Fund represent an equal pro rata
interest in the assets of the class to which such shares belong, and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except for class specific expenses and exclusive rights to vote on
matters affecting only individual classes. Sale of the Advisor Class for Select,
Heritage and Growth commenced on August 8, 1997, July 11, 1997 and June 4, 1997,
respectively. Sale of the Institutional Class commenced on March 13, 1997 for
Select and June 16, 1997 for both Heritage and Growth, respectively. The
following significant accounting policies, related to all classes of the Funds,
are in accordance with accounting policies generally accepted in the investment
company industry.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through valuations obtained
from a commercial pricing service or at the mean of the most recent bid and
asked prices. When valuations are not readily available, securities are valued
at fair value as determined in accordance with procedures adopted by the Board
of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of discounts and premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on investments and unrealized appreciation (depreciation)
on investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Funds may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Funds will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Funds and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Funds
bear the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS -- The Funds may enter into repurchase agreements with
institutions that the Funds' investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. Each Fund requires that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable
each Fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the value of the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to each Fund under each repurchase agreement.
28 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, each Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS -- It is the policy of the Funds to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are primarily due to differing
treatments for foreign currency transactions and wash sales.
ADDITIONAL INFORMATION -- Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc., and the Corporation's transfer agent, American Century Services
Corporation.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Funds with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Funds, except brokerage commissions, taxes, interest, expenses
of those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on each Fund's class average daily closing net assets during the previous month.
The annual management fee for the Investor Class, Advisor Class and
Institutional Class is 1.00%, 0.75% and 0.80%, respectively.
The Board of Directors has adopted a shareholder services and distribution
plan for the Advisor Class, pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Advisor Class Master Distribution and Shareholder Services Plan
provides that the Funds will pay ACIM an annual distribution fee equal to 0.25%
and service fee equal to 0.25%. The fees are computed daily and paid monthly
based on the Advisor Class's average daily closing net assets during the
previous month. The distribution fee provides compensation for distribution
expenses incurred by financial intermediaries in connection with distributing
shares of the Advisor Class including, but not limited to, payments to brokers,
dealers, and financial institutions that have entered into sales agreements with
respect to shares of the Funds. The service fee provides compensation for
shareholder and administrative services rendered by ACIM, its affiliates or
independent third party providers. Fees incurred under the Master Distribution
and Shareholder Services Plan for the period ended October 31, 1997 were $830,
$170 and $894 for Select, Heritage and Growth, respectively.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 29
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the year ended
October 31, 1997 were as follows:
SELECT HERITAGE GROWTH
($ IN THOUSANDS)
Purchases $4,078,527 $ 800,065 $3,515,099
Proceeds From Sales $4,439,860 $ 867,205 $4,354,630
On October 31, 1997, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal income tax purposes was as follows:
SELECT HERITAGE
GROWTH
($ IN THOUSANDS)
Appreciation ......... $1,178,682 $319,867 $1,569,569
Depreciation ......... (54,386) (51,497) (63,274)
----------- ---------- ------------
Net .................. $1,124,296 $268,370 $1,506,295
=========== ========== ============
Federal Tax Cost ..... $3,685,781 $1,051,806 $3,540,430
=========== ========== ============
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
There are 250,000,000, 250,000,000, and 500,000,000 shares of the Investor
Class authorized for issuance by Select, Heritage, and Growth, respectively.
There are 105,000,000, 105,000,000 and 210,000,000 shares of the Advisor Class
authorized for issuance for Select, Heritage and Growth, respectively. There are
41,000,000, 41,000,000 and 80,000,000 shares of the Institutional Class
authorized for issuance by Select, Heritage and Growth, respectively.
Transactions in shares of the Funds were as follows:
<TABLE>
SELECT HERITAGE GROWTH
Shares Amount Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS (IN THOUSANDS)
Year ended October 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Sold ...................... 17,600 $ 778,552 26,794 $ 355,329 35,274 $ 876,879
Issued in
reinvestment of
distributions ............. 9,470 371,414 5,793 68,885 3,935 87,875
Redeemed .................. (25,362) (1,106,798) (32,170) (418,518) (70,222) (1,687,973)
----------- ----------- ----------- ----------- ----------- -----------
Net increase
(decrease) ................ 1,708 $ 43,168 417 $ 5,696 (31,013) $ (723,219)
=========== =========== =========== =========== =========== ===========
Year ended October 31, 1996
Sold ...................... 10,936 $ 416,837 22,820 $ 266,770 34,900 $ 721,179
Issued in reinvestment
of distributions .......... 13,373 471,136 5,129 56,471 34,403 659,172
Redeemed .................. (28,464) (1,078,556) (25,302) (295,150) (69,582) (1,425,910)
----------- ----------- ----------- ----------- ----------- -----------
Net increase
(decrease) ................ (4,155) $ (190,583) 2,647 $ 28,091 (279) $ (45,559)
=========== =========== =========== =========== =========== ===========
</TABLE>
30 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS (CONT.)
<TABLE>
SELECT HERITAGE GROWTH
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------
ADVISOR CLASS
Period ended
October 31, 1997(1)
<S> <C> <C> <C> <C> <C> <C>
Sold ................. 30 $ 1,512 12 $ 167 81 $ 2,368
Issued in reinvestment
of distributions ..... -- -- -- -- -- --
Redeemed ............. (3) (163) (4) (52) (2) (50)
-------- -------- -------- -------- -------- --------
Net increase ......... 27 $ 1,349 8 $ 115 79 $ 2,318
======== ======== ======== ======== ======== ========
INSTITUTIONAL CLASS
Period ended
October 31, 1997(2)
Sold ................. 258 $ 10,551 9 $ 1,118 6 $ 158
Issued in reinvestment
of distributions ..... -- -- -- -- -- --
Redeemed ............. (20) (963) -- -- -- --
-------- -------- -------- -------- -------- --------
Net increase ......... 238 $ 9,588 9 $ 1,118 6 $ 158
======== ======== ======== ======== ======== ========
</TABLE>
- ----------
(1) Sale of the Advisor Class for Select, Heritage and Growth commenced on
August 8, 1997, July 11, 1997 and June 4, 1997, respectively.
(2) Sale of the Institutional Class for Select commenced on June 16, 1997 and
on March 13, 1997 for both Heritage and Growth, respectively.
- --------------------------------------------------------------------------------
5. AFFILIATED COMPANY TRANSACTIONS
A summary of transactions for each issuer which is or was an affiliate at or
during the year ended October 31, 1997, follows:
<TABLE>
Share Realized October 31, 1997
Balance Purchase Sales Gain Share Market
Fund/ Issuer(1) 10/31/96 Cost Cost (Loss) Balance Value
HERITAGE ($ IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
InaCom Corp. -- $2,299 $ 1,382 $ (119) 540,000 $16,639
========== =========== ========= ===========
GROWTH
- ---------------------------------------------------------------------------------------------------
Xylan Corporation 2,285,500 $15,153 $118,765 $(70,174) -- --
========== =========== ========= ===========
</TABLE>
- ----------
(1) None of the securities produced income during the period held.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 31
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SELECT
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............ $ 41.52 $ 39.52 $ 37.67 $ 45.76 $ 39.18
----------- ----------- ----------- --------- ---------
Income From
Investment Operations
Net Investment Income ........ 0.15(1) 0.20(1) 0.33(1) 0.40 0.46
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ................. 10.51 6.73 4.68 (3.59) 7.94
----------- ----------- ----------- --------- ---------
Total From Investment
Operations ................... 10.66 6.93 5.01 (3.19) 8.40
----------- ----------- ----------- --------- ---------
Distributions
From Net Investment
Income ....................... (0.32) (0.27) (0.28) (0.43) (0.49)
From Net Realized Gains on
Investment Transactions ...... (3.68) (4.66) (2.75) (4.47) (1.31)
In Excess of Net
Realized Gains ............... -- -- (0.13) -- (0.02)
----------- ----------- ----------- --------- ---------
Total Distributions .......... (4.00) (4.93) (3.16) (4.90) (1.82)
----------- ----------- ----------- --------- ---------
Net Asset Value,
End of Year .................. $ 48.18 $ 41.52 $ 39.52 $ 37.67 $ 45.76
=========== =========== =========== ========= =========
Total Return(2) .............. 27.89% 19.76% 15.02% (7.37)% 22.20%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........ 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income
to Average Net Assets ........ 0.33% 0.50% 0.90% 1.00% 1.10%
Portfolio Turnover Rate ...... 94% 105% 106% 126% 82%
Average Commission
Paid per Share of Equity
Security Traded .............. $ 0.0457 $ 0.0410 $ 0.0460 --(3) --(3)
Net Assets, End of Year
(in millions) ................ $ 4,769 $ 4,039 $ 4,008 $ 4,278 $ 5,160
</TABLE>
- ----------
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Disclosure of average commission paid per share of equity security traded
was not required prior to the year ended October 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS
32 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS
SELECT
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD AS INDICATED
Advisor
Class
1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ......................... $ 49.43
----------
Income From Investment Operations
Net Investment Loss(2) ....................................... (0.02)
Net Realized and Unrealized Loss on
Investment Transactions ...................................... (1.25)
----------
Total From Investment Operations ............................. (1.27)
----------
Net Asset Value, End of Period ............................... $ 48.16
==========
Total Return(3) .............................................. (2.57)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ............ 1.25%(4)
Ratio of Net Investment Loss to Average Net Assets ........... (0.17)%(4)
Portfolio Turnover Rate ...................................... 94%
Average Commission Paid per Share of Equity Security Traded .. $ 0.045
Net Assets, End of Period (in thousands) ..................... $ 1,289
- ----------
(1) August 8, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT FINANCIAL HIGHLIGHTS 33
FINANCIAL HIGHLIGHTS
SELECT
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD AS INDICATED
Institutional
Class
1997(1)
PER-SHARE DATA
Net Asset Value,
Beginning of Period ............................................... $40.56
---------
Income From
Investment Operations
Net Investment Income(2) ........................................... 0.13
Net Realized and Unrealized
Gain on Investment Transactions .................................... 7.55
---------
Total From
Investment Operations .............................................. 7.68
----------
Net Asset Value,
End of Period ...................................................... $48.24
==========
Total Return(3) .................................................... 18.93%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .............................................. 0.80%(4)
Ratio of Net Investment
Income to Average Net Assets ....................................... 0.45%(4)
Portfolio Turnover Rate ............................................ 94%
Average Commission Paid
per Share of Equity Security Traded ................................ $0.0457
Net Assets,
End of Period (in thousands) $11,486
- ----------
(1) March 13, 1997 (commencement of sale) through october 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
34 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
HERITAGE
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............ $ 12.24 $ 11.75 $ 10.32 $ 11.03 $ 9.30
----------- ----------- ----------- ------- -------
Income From
Investment Operations
Net Investment Income ........ 0.01(1) --(1) 0.05(1) 0.07 0.07
Net Realized and
Unrealized Gain (Loss)
on Investment Transactions ... 3.41 1.15 1.96 (0.21) 2.43
----------- ----------- ----------- ------- -------
Total From Investment
Operations ................... 3.42 1.15 2.01 (0.14) 2.50
----------- ----------- ----------- ------- -------
Distributions
From Net Investment Income ... (0.09) (0.05) (0.03) (0.06) (0.09)
From Net Realized Gains on
Investment Transactions ...... (0.71) (0.61) (0.52) (0.50) (0.68)
In Excess of Net
Realized Gains ............... -- -- (0.03) (0.01) --
----------- ----------- ----------- ------- -------
Total Distributions .......... (0.80) (0.66) (0.58) (0.57) (0.77)
----------- ----------- ----------- ------- -------
Net Asset Value,
End of Year .................. $ 14.86 $ 12.24 $ 11.75 $ 10.32 $ 11.03
=========== =========== =========== ======= =======
Total Return(2) .............. 29.56% 10.44% 21.04% (1.13)% 28.64%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ........ 1.00% 0.99% 0.99% 1.00% 1.00%
Ratio of Net Investment Income
to Average Net Assets ........ 0.05% -- 0.50% 0.70% 0.70%
Portfolio Turnover Rate ...... 69% 122% 121% 136% 116%
Average Commission
Paid per Share of Equity
Security Traded .............. $ 0.0436 $ 0.0420 $ 0.0420 --(3) --(3)
Net Assets, End of Year
(in millions) ................ $ 1,321 $ 1,083 $ 1,008 $ 897 $ 702
</TABLE>
- ----------
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Disclosure of average commission paid per share of equity security traded
was not required prior to the year ended October 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT FINANCIAL HIGHLIGHTS 35
FINANCIAL HIGHLIGHTS
HERITAGE
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD AS INDICATED
Advisor
Class
1997(1)
PER-SHARE DATA
Net Asset Value,
Beginning of Period ...................................... $ 14.23
---------
Income From Investment Operations
Net Investment Loss(2) ................................... (0.01)
Net Realized and
Unrealized Gain
on Investment Transactions ............................... 0.63
---------
Total From Investment Operations ......................... 0.62
---------
Net Asset Value, End of Period ........................... $ 14.85
=========
Total Return(3) .......................................... 4.36%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .................................... 1.25%(4)
Ratio of Net Investment
Loss to Average Net Assets ............................... (0.23)%(4)
Portfolio Turnover Rate .................................. 69%
Average Commission Paid
per Share of Equity Security Traded ...................... $ 0.0436
Net Assets, End of Period (in thousands) ................. $ 120
- ----------
(1) July 11, 1997 (commencement of sale) through october 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
36 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS
HERITAGE
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD AS INDICATED
Institutional
Class
1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ................................ $13.60
----------
Income From Investment Operations
Net Investment Income(2) ............................................ 0.01
Net Realized and Unrealized
Gain on Investment Transactions ..................................... 1.26
----------
Total From Investment Operations .................................... 1.27
----------
Net Asset Value, End of Period ...................................... $14.87
==========
Total Return(3) ..................................................... 9.34%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to
Average Net Assets .................................................. 0.80%(4)
Ratio of Net Investment Income to
Average Net Assets ................................................. 0.21%(4)
Portfolio Turnover Rate ............................................. 69%
Average Commission Paid per Share
of Equity Security Traded ........................................... $0.0436
Net Assets, End of Period (in thousands) ............................ $129
- ----------
(1) June 16, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. total returns for periods less than one year are not
annualized.
(4) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT FINANCIAL HIGHLIGHTS 37
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GROWTH
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31
Investor Class
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ......... $ 22.21 $ 23.88 $ 22.99 $ 25.27 $ 23.64
----------- ----------- ----------- --------- ---------
Income From Investment
Operations
Net Investment
Income (Loss) ............. 0.01(1) (0.01)(1) 0.08(1) 0.06 0.06
Net Realized and Unrealized
Gain on Investment
Transactions .............. 6.07 1.47 4.08 0.48 1.94
----------- ----------- ----------- --------- ---------
Total From Investment
Operations ................ 6.08 1.46 4.16 0.54 2.00
----------- ----------- ----------- --------- ---------
Distributions
From Net Investment
Income .................... (0.18) (0.07) (0.05) (0.06) --
From Net Realized
Gains on Investment
Transactions .............. (0.25) (2.98) (3.18) (2.76) (0.36)
In Excess of
Net Realized Gains ........ -- (0.08) (0.04) -- (0.01)
----------- ----------- ----------- --------- ---------
Total Distributions ....... (0.43) (3.13) (3.27) (2.82) (0.37)
----------- ----------- ----------- --------- ---------
Net Asset Value,
End of Year ............... $ 27.86 $ 22.21 $ 23.88 $ 22.99 $ 25.27
=========== =========== =========== ========= =========
Total Return(2) ........... 27.85% 8.18% 22.31% 2.66% 8.48%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ..... 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment
Income (Loss) to Average
Net Assets ................ 0.02% (0.10)% 0.40% 0.30% 0.20%
Portfolio Turnover Rate ... 75% 122% 141% 100% 94%
Average Commission Paid
per Share of Equity
Security Traded ........... $ 0.0393 $ 0.0360 $ 0.0400 --(3) --(3)
Net Assets, End of Year
(in millions) ............. $ 5,113 $ 4,765 $ 5,130 $ 4,363 $ 4,641
</TABLE>
- ----------
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Disclosure of average commission paid per share of equity security traded
was not required prior to the year ended October 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS
38 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS
GROWTH
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD AS INDICATED
Advisor
Class
1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ................................. $24.36
----------
Income From Investment Operations
Net Investment Loss(2) ............................................... (0.06)
Net Realized and Unrealized
Gain on Investment Transactions ...................................... 3.54
----------
Total From Investment Operations ..................................... 3.48
----------
Net Asset Value, End of Period ....................................... $27.84
==========
Total Return(3) ...................................................... 14.29%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................................................ 1.25%(4)
Ratio of Net Investment Loss
to Average Net Assets ................................................ (0.47)%
(4)
Portfolio Turnover Rate .............................................. 75%
Average Commission Paid
per Share of Equity Security Traded .................................. $0.0393
Net Assets,
End of Period (in thousands) ......................................... $2,200
- ----------
(1) June 4, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT FINANCIAL HIGHLIGHTS 39
FINANCIAL HIGHLIGHTS
GROWTH
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD AS INDICATED
Institutional
Class
1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ................................. $25.75
----------
Income From Investment Operations
Net Investment Income(2) ............................................. 0.01
Net Realized and Unrealized
Gain on Investment Transactions ...................................... 2.12
----------
Total From Investment Operations ..................................... 2.13
----------
Net Asset Value, End of Period ....................................... $27.88
==========
Total Return(3) ...................................................... 8.27%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................................................ 0.80%(4)
Ratio of Net Investment Income
to Average Net Assets ................................................ 0.07%(4)
Portfolio Turnover Rate .............................................. 75%
Average Commission Paid per
Share of Equity Security Traded ...................................... $0.039
Net Assets,
End of Period (in thousands) ......................................... $171
- ----------
(1) June 16, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
40 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, American Century Mutual Funds, Inc:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of American Century - Twentieth Century
Select Fund, American Century - Twentieth Century Heritage Fund and American
Century - Twentieth Century Growth Fund (collectively the "Funds"), three of the
funds comprising American Century Mutual Funds, Inc. (formerly Twentieth Century
Investors, Inc.), as of October 31, 1997, and the related statements of
operations and changes in net assets for the year then ended, and the financial
highlights for the year then ended. These financial statements and the financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits. The financial statements and the financial
highlights of the Funds for each of the years in the four-year period ended
October 31, 1996 were audited by other auditors whose report, dated November 20,
1996, expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century
Twentieth Century Select Fund, American Century - Twentieth Century Heritage
Fund and American Century - Twentieth Century Growth Fund as of October 31,
1997, the results of their operations, the changes in their net assets, and the
financial highlights for the year then ended in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 26, 1997
ANNUAL REPORT INDEPENDENT AUDITORS' REPORT 41
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the ensuing
year or until their successors are elected and qualified.
SELECT HERITAGE GROWTH
James E. Stowers, Jr.
For: 62,737,540 44,623,569 118,696,957
Withheld: 1,022,072 948,548 5,448,791
James E. Stowers III
For: 62,751,819 44,635,337 118,723,509
Withheld: 1,007,793 936,780 5,422,239
Thomas A. Brown
For: 62,829,507 44,697,555 118,850,326
Withheld: 930,105 874,562 5,295,422
Robert W. Doering, M.D.
For: 62,762,757 44,644,631 118,724,825
Withheld: 996,855 927,486 5,420,923
D.D. (Del) Hock
For: 62,785,187 44,666,138 118,790,569
Withheld: 974,425 905,979 5,355,179
Linsley L. Lundgaard
For: 62,718,162 44,594,156 118,686,537
Withheld: 1,041,450 977,961 5,459,211
Donald H. Pratt
For: 62,825,579 44,691,629 118,834,410
Withheld: 934,033 880,488 5,311,338
Lloyd T. Silver, Jr.
For: 62,777,223 44,662,166 118,757,539
Withheld: 982,389 909,951 5,388,209
M. Jeannine Strandjord
For: 62,819,293 44,690,042 118,827,948
Withheld: 940,319 882,075 5,317,800
PROPOSAL 2:
To vote on approval of a Management Agreement with American Century
Investment Management, Inc.
SELECT
INVESTOR INSTITUTIONAL
For: 59,637,134 254,922
Against: 1,319,169 --
Abstain: 237,980 --
Broker
Non-Vote: 2,310,407 --
HERITAGE GROWTH
INVESTOR INVESTOR
For: 43,693,092 113,799,304
Against: 1,104,915 2,623,066
Abstain: 351,910 2,636,731
Broker
Non-Vote: 422,200 5,086,647
PROPOSAL 3:
To vote on the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
SELECT HERITAGE GROWTH
For: 62,603,688 44,486,251 119,829,210
Against: 953,560 860,828 1,884,108
Abstain: 202,364 225,038 2,432,430
42 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification of
investments.
SELECT HERITAGE GROWTH
For: 57,462,796 42,627,879 111,201,900
Against: 3,566,605 2,042,576 5,020,965
Abstain: 419,804 479,462 2,836,236
Broker
Non-Vote: 2,310,407 422,200 2,086,647
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
SELECT HERITAGE GROWTH
For: 57,909,801 42,529,408 110,980,892
Against: 3,115,654 2,136,256 5,153,789
Abstain: 423,750 484,253 2,924,420
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Amend the fundamental investment limitation concerning borrowing.
SELECT HERITAGE GROWTH
For: 57,216,415 42,296,336 110,783,980
Against: 3,807,202 2,362,944 5,332,822
Abstain: 425,588 490,637 2,942,299
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Amend the fundamental investment limitation concerning lending.
SELECT HERITAGE GROWTH
For: 57,304,545 42,306,009 110,848,897
Against: 3,714,724 2,359,900 5,274,153
Abstain: 429,936 484,008 2,936,051
Broker
Non-Vote: 2,310,407 422,200 5,086,647
*Amend the fundamental investment limitation concerning concentration of
investments in a particular industry.
SELECT HERITAGE GROWTH
For: 57,335,768 42,442,795 110,890,962
Against: 3,688,719 2,224,370 5,236,554
Abstain: 424,718 482,752 2,931,585
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
SELECT HERITAGE GROWTH
For: 57,969,236 42,499,703 110,953,267
Against: 3,049,832 2,168,888 5,167,423
Abstain: 430,137 481,326 2,938,411
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Eliminate the fundamental limitation concerning investment in other investment
companies.
SELECT HERITAGE GROWTH
For: 58,115,302 42,561,413 111,068,663
Against: 2,906,769 2,107,999 5,070,068
Abstain: 427,134 480,505 2,920,370
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Amend the fundamental investment limitation concerning investments in real
estate.
SELECT HERITAGE GROWTH
For: 58,141,371 42,605,271 111,089,145
Against: 2,885,454 2,063,237 5,042,262
Abstain: 422,380 481,409 2,927,694
Broker
Non-Vote: 2,310,407 422,200 2,086,647
ANNUAL REPORT PROXY VOTING RESULTS 43
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning underwriting.
SELECT HERITAGE GROWTH
For: 58,138,571 42,544,398 111,129,978
Against: 2,885,579 2,102,677 5,001,077
Abstain: 425,055 502,842 2,928,046
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Amend the fundamental investment limitation concerning commodities.
SELECT HERITAGE GROWTH
For: 57,793,404 42,369,636 110,833,850
Against: 3,227,532 2,281,925 5,292,499
Abstain: 8,269 498,356 2,932,752
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
SELECT HERITAGE GROWTH
For: 58,085,454 42,532,389 111,030,585
Against: 2,937,955 2,130,814 5,113,202
Abstain: 425,796 486,714 2,915,317
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Eliminate the fundamental limitation concerning short sales.
SELECT HERITAGE GROWTH
For: 57,961,357 42,365,457 110,807,759
Against: 3,060,977 2,292,392 5,312,002
Abstain: 426,871 492,068 2,939,340
Broker
Non-Vote: 2,310,407 422,200 5,086,647
* Eliminate the fundamental investment limitation concerning margin purchases of
securities.
SELECT HERITAGE GROWTH
For: 57,944,053 42,323,194 110,516,185
Against: 3,077,525 2,331,177 5,438,135
Abstain: 427,627 495,546 3,104,781
Broker
Non-Vote: 2,310,407 422,200 5,086,647
PROPOSAL 5:
To vote to approve the amendment of a fundamental investment policy.
(Heritage only)
For: 43,005,155
Against: 1,817,545
Abstain: 327,217
Broker Non-Vote: 422,200
44 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
SHARE CLASS AND RETIREMENT ACCOUNT INFORMATION
SHARE CLASSES
Until September 3, 1996, the Select, Heritage and Growth funds issued one
class of fund shares, reflecting the fact that most investors bought their
shares directly from American Century. All investors paid the same annual
unified management fee and did not pay any commissions or other fees to purchase
shares from American Century.
Now more share purchases are made by investors through financial
intermediaries (who ordinarily are compensated for the additional services they
provide) or by very large institutional investors who expect lower costs because
of their size. In September 1996, American Century began to offer three classes
of shares for the Select, Heritage and Growth funds. One class is for investors
who buy directly from American Century, one is for investors who buy through
financial intermediaries, and the third is for large institutional customers.
The original class of Select, Growth and Heritage shares is called the
INVESTOR CLASS. All shares issued and outstanding before September 3, 1996 have
been designated Investor Class shares. Investor Class shares may also be
purchased after September 3, 1996. Investor Class shareholders do not pay any
commissions or other fees for purchase of funds shares directly from American
Century. Investors who buy Investor Class shares through a broker-dealer may be
required to pay the broker-dealer a transaction fee. THE PRICE AND PERFORMANCE
OF THE INVESTOR CLASS SHARES ARE LISTED IN NEWSPAPERS. NO OTHER CLASS IS
CURRENTLY LISTED.
In addition, there is an ADVISOR CLASS, which is sold through banks,
broker-dealers, insurance companies and financial advisors. Advisor Class shares
are subject to a 0.50% Rule 12b-1 service and distribution fee. Half of that fee
is available to pay for recordkeeping and administrative services, and half is
available to pay for distribution services provided by the financial
intermediary through which the Advisor Class shares are purchased. The total
expense ratio of the Advisor Class is 0.25% higher than the total expense ratio
of the Investor Class.
There is also an INSTITUTIONAL CLASS, which is available to endowments,
foundations, defined-benefit pension plans or financial intermediaries serving
these investors. This class recognizes the relatively lower cost of serving
institutional customers and others who invest at least $5 million in an American
Century fund or at least $10 million in multiple funds. In recognition of the
larger investments and account balances and comparatively lower transaction
costs, the total expense ratio of the Institutional Class is 0.20% less than the
total expense ratio of the Investor Class shares.
All classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
ANNUAL REPORT SHARE CLASS AND RETIREMENT ACCOUNT INFORMATION 45
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers 10 equity funds that invest in the stocks
of growing companies, both domestically and internationally. The philosophy
behind these growth funds focuses on three important principles. First, the
funds seek to own successful companies, which we define as those whose earnings
and revenues are growing at accelerating rates. Second, we attempt to keep the
funds fully invested, regardless of short-term market activity. Experience has
shown that market gains can occur in unpredictable spurts and that missing those
opportunities can significantly limit potential for gain. Third, the funds are
managed by teams, rather than by one "star". We believe this allows us to make
better, more consistent management decisions.
In addition to these principles, each fund has its own investment policies:
TWENTIETH CENTURY SELECT seeks large, established companies that show
accelerating growth rates; also, at least 80% of the fund's assets must be
invested in stocks or securities that pay regular dividends or otherwise produce
income. These dividends, and the established nature of the companies in which
Select invests, help lessen the fund's short-term price fluctuations.
TWENTIETH CENTURY HERITAGE seeks smaller and mid-sized firms showing
accelerating growth rates, and at least 60% of its assets must be in stocks or
securities paying regular dividends or otherwise producing income. While
Heritage's dividend requirement should make the fund less volatile than funds
without dividends, it should also display somewhat more price variability-and
greater long-term growth potential-than Select.
TWENTIETH CENTURY GROWTH invests in larger, more established firms that
exhibit accelerating growth. Because the value of established firms tends to
change relatively slowly, Growth can ordinarily be expected to show more
moderate price fluctuations than growth funds that invest in smaller or
mid-sized firms.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500 publicly
traded U.S. companies that are considered to be leading firms in dominant
industries. Created by Standard & Poor's Corporation, the index is viewed as
broad measure of U.S. stock market performance.
The S&P MIDCAP 400 INDEX is a capitalization-weighted index of the stocks of
the 400 largest leading U.S. companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-capitalization stocks generally. The index was created in March 1994. Data
presented for prior periods have been provided by S&P.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
- --------------------------------------------------------------------------------
SELECT:
Portfolio Manager Jean Ledford
HERITAGE:
Portfolio Manager Nancy Prial
GROWTH:
Portfolio Managers Kim Goodwin
John Sykora
- --------------------------------------------------------------------------------
46 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
TOTAL RETURN figures show the overall dollar or percentage change in the
value of a hypothetical investment in the Portfolio and assume that all of the
Portfolio's distributions are reinvested.
AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the Portfolio's cumulative total returns if the Portfolio's
performance had been constant over the entire period. Average annual total
returns smooth out variations in a fund's return; they are not the same as
year-by-year results. For fiscal year-by-year total returns, please refer to the
Portfolio's "FINANCIAL HIGHLIGHTS" on page 32-40.
PORTFOLIO STATISTICS
NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by
dividing a company's stock price by its earnings per share, with the result
expressed as a multiple instead of as a percentage. (Earnings per share is
calculated by dividing the after-tax earnings of a corporation by its
outstanding shares.)
PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
EXPENSE RATIO-- the operating expenses of the fund, expressed as a
percentage of average net assets. Shareholders pay an annual fee to the
investment manager for investment advisory and management services. The expenses
and fees are deducted from fund income, not from each shareholder account. (See
Note 2 in the Notes to Financial Statements.)
TYPES OF STOCKS
BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Merck & Company.
CYCLICAL STOCKS-- stocks whose price and earnings fluctuations tend to
follow the ups and downs of the business cycle. Examples include the stocks of
automobile manufacturers, steel producers and textile operators.
GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples currently include the stocks of high-tech,
computer hardware and computer software companies.
LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- stocks of companies with a
market capitalization (the total value of a company's outstanding stock) of more
than $500 million. These tend to be the stocks that make up the Dow Jones
Industrial Average, the S&P 500 and the Russell 1000 Index.
MEDIUM CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- stocks of companies with a
market capitalization (the total value of a company's outstanding stock) of less
than $500 million. These tend to be the stocks that make up the Nasdaq Composite
Index and the Russell 2000 Index.
VALUE STOCKS--stocks that are purchased because they are relatively
inexpensive. These stocks are typically characterized by low P/E ratios.
STATISTICAL TERMINOLOGY
PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
ANNUAL REPORT GLOSSARY 47
NOTES
48 NOTES AMERICAN CENTURY INVESTMENTS
NOTES
ANNUAL REPORT NOTES 49
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-753-1865
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
9712 [recycled logo]
SH-BKT-10469 Recycled
<PAGE>
ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
TWENTIETH
CENTURY
GROUP
Ultra
Vista
TABLE OF CONTENTS
Report Highlights ......................................................... 1
Our Message to You ........................................................ 2
Market Perspective ........................................................ 3
Ultra
Performance & Portfolio Information ............................ 4
Management Q & A ............................................... 5
Schedule of Investments ........................................ 8
Financial Highlights ........................................... 25
Vista
Performance & Portfolio Information ............................ 12
Management Q & A ............................................... 13
Schedule of Investments ........................................ 16
Financial Highlights ........................................... 28
Statements of Assets and Liabilities ...................................... 18
Statements of Operations .................................................. 19
Statements of Changes in Net Assets ....................................... 20
Notes to Financial Statements ............................................. 21
Independent Auditors' Report .............................................. 31
Proxy Voting Results ...................................................... 32
Share Class and Retirement
Account Information ....................................................... 35
Background Information
Investment Philosophy and Policies ............................. 36
Comparative Indices ............................................ 36
Investment Team Leaders ........................................ 36
Glossary .................................................................. 37
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
Ultra
Vista
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* U.S. stock market returns were strong across capitalization ranges, with
the stocks of large and medium-sized companies posting the strongest gains
and small-cap stocks coming close behind.
* The S&P 500's total return for the year ended October 31, 1997, was
32.10%, compared to 32.67% for the S&P 400 and 29.33% for the Russell
2000.
* The strong gains were attributable to the continuing U.S. economic
expansion, which is the third longest since World War II. Although the
market indices had a strong showing, the ride was not smooth.
* Gains for small- and mid-cap stocks surpassed large-cap returns in August,
following earnings disappointments by several multinational consumer
companies. Stocks of all sizes faltered in October, as the market reacted
to turmoil in southeast Asian markets.
ULTRA
* The fund's Investor Class had a total return of 19.95% for the year ended
October 31, 1997. Over its 16-year life, the fund has averaged a 17.84%
annual return.
* The fund's top performing stocks came from the pharmaceutical, banking and
computer systems and software industries.
* Fund managers decreased the fund's weighting in technology stocks and
concentrated on those companies where fund managers believe earnings
growth is strongest and most sustainable.
* Companies added during the period include those in the cable and airline
industries, both of which are benefiting from improved industry pricing.
VISTA
* For the year ended October 31, 1997, Vista's Investor Class had a total
return of 0.29%. The fund had an impressive 26.68% gain during the final
six months of the period, when small- and medium-capitalization stocks
rallied. However, that performance was offset by losses in the prior
six-month period.
* Vista benefited in the period's second half as investor faith in the
earnings prospects of smaller, fast-growing companies increased and as
earnings slowed among some high-profile large-cap companies.
* Top-performing holdings in Vista included energy and specialty software
companies. Positions were increased in energy, high-tech contract
manufacturers and retailers.
ULTRA
INVESTOR CLASS(1)
TOTAL RETURNS: AS OF 10/31/97
6 Months 14.94%(2)
1 Year 19.95%
NET ASSETS: $21.7 billion
(AS OF 10/31/97)
INCEPTION DATE: 11/2/81
TICKER SYMBOL: TWCUX
VISTA
INVESTOR CLASS(1)
TOTAL RETURNS: AS OF 10/31/97
6 Months 26.68%(2)
1 Year 0.29%
NET ASSETS: $1.8 billion
(AS OF 10/31/97)
INCEPTION DATE: 11/25/83
TICKER SYMBOL: TWCVX
(1) See Share Classes, page 35.
(2) Not annualized.
Many of the investment terms in this report are defined in the Glossary on page
37.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers, Jr. and James E. Stowers III]
The stock market's bull run continued in 1997, although there were a few
stumbles. In August, several widely-held companies announced earnings
disappointments and, in October, currency devaluations in southeast Asia rumbled
through markets worldwide. The U.S. market rebounded after each period of
turbulence, as the underlying strength of the economy supported a continued
advance in stock prices. Despite fallout from Asian markets, there are many
reasons to believe strong stock performance will continue. Fundamental
indicators of the U.S. economy's health remain solid, providing an environment
for companies to build earnings without surrendering gains to inflation.
Not all investors participated equally in the market's performance. Our
funds that invest in the stocks of small- and mid-sized companies had a
disappointing fiscal year. We have increased our focus on these funds to provide
additional staffing and other resources the team needs to achieve improved
returns. We are not satisfied with results of the past year and are committed to
doing better.
In 1998, American Century will enter its 40th year, a landmark few mutual
fund companies can claim. During the 1990s, we have broadened our range of
investment choices dramatically to meet your needs. Today, American Century
offers nearly 70 funds, enabling us to meet a broad array of investor
objectives.
The company's tradition of creating new opportunities for investors
continued in July, when we announced that J.P. Morgan had agreed to become a
significant minority shareholder in American Century. For more than 150 years,
J.P. Morgan has served institutions, governments and individuals with complex
financial needs. Within the framework of this proposed relationship, American
Century will continue to operate as an independent company. Our corporate
management team will remain the same, and the Stowers family will retain voting
control of the company. This proposed business partnership will allow us to
expand and enhance the services we provide investors.
These are interesting times to be in the mutual fund industry, whether as an
investor or a CEO. Some analysts see inflation on the horizon. Others see
deflation, as global competition forces prices downward. Meanwhile, investors
enjoy new choices when investing for retirement, including the expanded
opportunities provided by the Taxpayer Relief Act of 1997. Whatever your needs
or outlook, we hope you will give us an opportunity to help you reach your
financial goals.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder President and Chief Executive Officer
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
THE YEAR IN REVIEW
On October 31, 1997, the U.S. economic expansion completed its eightieth
month, making it the third longest since World War II. A 106-month-long period
of sustained economic growth in the 1960s is the record holder, followed by a
92-month spell in the 1980s. The difference this decade is an average rate of
inflation of just over 2% annually, much lower than at similar stages during
earlier expansions. Wage pressure, a key component of inflation, has yet to
materialize despite the lowest unemployment rates since the early 1970s. U.S.
corporations have used restructurings and technological advances to increase
productivity more rapidly than the demand for labor. In the absence of
inflationary pressure, interest rates have remained low, reducing corporate
borrowing costs. As a result, profit margins are at their highest levels since
1969 and the economy has benefited greatly. It grew at a torrid annual pace of
4.9% in the first quarter of 1997, the strongest quarter in more than nine
years. Growth in the second and third quarters remained strong, at annual rates
of 3.3% each quarter.
THE MARKETS
The stock market has reflected this period of economic growth, with all
sectors showing robust returns. The chart above captures the market's climb
during the year ended October 31, 1997. Although the indices had a strong
showing, the ride was not smooth, with levels of volatility and volumes of
shares traded setting records in August and October. Whereas the S&P 500 was far
ahead of the other indices at April 30, 1997, the gap had closed six months
later.
[line graph - data below]
MARKET PERFORMANCE MEASUREMENTS
Comparative Growth of $1.00 for the year ended October 31, 1997
S&P 500 S&P 400 Russell 2000
Growth
10/31/96 $1.00 $1.00 $1.00
11/30/96 $1.07 $1.06 $1.04
12/31/96 $1.06 $1.06 $1.07
1/31/97 $1.12 $1.10 $1.09
2/28/97 $1.13 $1.09 $1.06
3/31/97 $1.08 $1.04 $1.01
4/30/97 $1.15 $1.07 $1.02
5/31/97 $1.21 $1.16 $1.13
6/30/97 $1.27 $1.20 $1.18
7/31/97 $1.37 $1.31 $1.23
8/31/97 $1.29 $1.31 $1.26
9/30/97 $1.37 $1.39 $1.35
10/31/97 $1.32 $1.33 $1.29
Comparative One-Year Returns for the year ended October 31, 1997
S&P 500 32.10%
S&P MidCap 400 32.67%
Russell 2000 29.33%
SOURCE: LIPPER ANALYTICAL SERVICES, INC.
A handful of large, multinational stocks continued their two-year dominance
of the market until August, when Coca-Cola and Gillette announced earnings
disappointments. Other large companies followed with similar announcements,
leading to an abrupt halt in the market's relentless upward march and the
outperformance of large stocks. The S&P 500 index was down 5.8% for the month of
August.
Stock prices resumed their upward move in September; however, the gains of
small and mid-cap stocks exceeded those of large caps. October saw another
reversal as the market reacted to news of currency devaluations across southeast
Asia. Those devaluations sent market indices plummeting in such emerging markets
as Thailand, Malaysia and Singapore. U.S. investors started paying attention
when the panic selling reached Hong Kong and European markets. The S&P 500
dropped 3.45% in October, the S&P MidCap 400 dropped 4.35% and the Russell 2000
fell 4.39% amid fears that the sell-off overseas would translate into reduced
corporate profits for U.S. multinational companies in 1998.
The relative outperformance of medium- and small-cap stocks later in the
year resulted from several factors. These companies' profits are not as
dependent on foreign trade as the profits of larger companies; small companies
were not tainted by the earnings disappointments that hurt the large-cap sector
over the summer; and small-cap prices had reached very attractive levels
relative to earnings, positioning them for a strong rebound.
ANNUAL REPORT MARKET PERSPECTIVE 3
<TABLE>
<CAPTION>
ULTRA
TOTAL RETURNS AS OF OCTOBER 31, 1997*
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS LIFE OF FUND
INVESTOR CLASS (inception 11/2/81)
<S> <C> <C> <C> <C> <C> <C>
Ultra ........................ 14.94% 19.95% 22.07% 20.00% 22.52% 17.84%
S&P 500 ...................... 15.14% 32.10% 27.45% 19.82% 17.13% 17.25%
ADVISOR CLASS (inception 10/2/96)
Ultra ........................ 14.76% 19.59% ...................................................... 17.92%
S&P 500 ...................... 15.14% 32.10% ...................................................... 31.37%
INSTITUTIONAL CLASS (inception 11/14/96)
Ultra ........................ 15.07% ...................................................................... 15.28%
S&P 500 ...................... 15.14% ...................................................................... 26.61%
</TABLE>
- ----------
*Returns for periods less than one year are not annualized.
See pages 35, 36 and 37 for more information about share classes, the S&P 500
and returns.
[line graph - data below]
GROWTH OF $10,000 OVER 10 YEARS (Investor Class) $10,000 investment made
10/31/97
ULTRA S & P 500
10/31/87 $10,000 $10,000
10/31/88 $11,953 $11,483
10/31/89 $16,779 $14,500
10/31/90 $15,265 $13,410
10/31/91 $30,762 $17,902
10/31/92 $30,623 $19,680
10/31/93 $42,805 $22,610
10/31/94 $41,914 $23,485
10/31/95 $57,376 $29,675
10/31/96 $63,566 $36,805
10/31/97 $76,245 $48,620
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. Data quoted is for Investor Class only; performance for other
classes will vary due to differences in fee structures (see the Total Returns
table above).
The line representing Ultra's total return includes operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
return line of the S&P 500 does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Companies 137 109
Median Price/Earnings Ratio 24.7 26.8
Portfolio Turnover 107% 87%
Expense Ratio (for Investor Class) 1.00% 1.00%
4 ULTRA AMERICAN CENTURY INVESTMENTS
ULTRA
MANAGEMENT Q & A
An interview with Jim Stowers III and Bruce Wimberly, portfolio managers on
the Ultra investment team.
Note: All fund returns referenced in this interview are for Investor Class
shares.
HOW DID THE FUND PERFORM?
Ultra shareholders continued to enjoy a strong absolute return on their
investment. The fund had a total return of 19.95% for the year ended October 31,
1997. Over the 16-year life of the fund, it has averaged a 17.84% annual return.
In the most recent six-month period, the fund provided attractive returns as
investors favored the stocks of many large companies with high growth rates.
In comparative terms, the fund's returns matched those of the S&P 500 for
the final six months of the period, with both at approximately 15%. As we noted
in the semiannual report, Ultra lagged the S&P 500 during the first six months
of the fund's fiscal year, which explains the S&P 500's higher return for the
year. As experienced growth investors know, the stocks of companies with
accelerating earnings come in and out of favor in the market. For the year ended
October 31, 1997, growth stocks had a relatively weak first half, rallied
sharply in the summer, and retreated with the rest of the market in October.
Despite these rotations in investor sentiment, we remain committed to our
investment philosophy of accelerating growth because we believe, over time, a
stock's price will follow earnings upward.
WHAT STOCKS OR SECTORS CONTRIBUTED MOST TO PERFORMANCE DURING THE YEAR?
From the table on page 6, you can see pharmaceuticals, banking and financial
services were our top three sector weightings at October 31, 1997. The biggest
individual stock contributors to performance were found in these sectors and in
computer systems and software.
[bar chart - data below]
ULTRA'S ONE-YEAR RETURNS (Periods ended October 31)
ULTRA S & P 500
10/31/88 19.52% 14.83%
10/31/89 40.37% 26.27%
10/31/90 -9.02% -7.52%
10/31/91 101.51% 33.50%
10/31/92 -0.45% 9.93%
10/31/93 39.78% 14.89%
10/31/94 -2.08% 3.87%
10/31/95 36.89% 26.36%
10/31/96 10.79% 24.03%
10/31/97 19.95% 32.10%
This chart illustrates the fund's returns over the past 10 years and compares
them with the S&P 500's returns. Ultra's total returns include operating
expenses, while the S&P 500's returns do not. See page 36 for a description of
the S&P 500. Past performance is no guarantee of future results. Investment
return and principal value will fluctuate, and redemption value may be more or
less than original cost.
*Investor Class.
ANNUAL REPORT ULTRA 5
ULTRA
Dell Computer Corp. contributed the most to Ultra's performance this past 12
months, closely followed by Intel Corp. and several large pharmaceutical
holdings. Dell and Intel benefited from strong underlying computer demand and
market share gains. Pharmaceutical stocks in the S&P 500 outperformed the index
as a whole and Ultra's large pharmaceutical weightings -- Pfizer, Inc., Eli
Lilly & Co. and Warner-Lambert Co. -- outperformed the S&P 500's drug stocks.
Investors rewarded these companies' volume growth (the increasing number of
products they sold), market share gains, and extensive new product pipelines.
The top performing bank stocks in Ultra included BankAmerica Corp., Citicorp and
Chase Manhattan Corp. They continued to benefit from benign interest rates,
industry consolidation, and strong cost controls.
WHAT STOCKS OR SECTORS REDUCED THE FUND'S RETURNS?
Dislocations in technology continued to weigh heavily on many of the leading
stocks in this sector, including such holdings as Texas Instruments Inc. and
Applied Materials, Inc. Like other cyclical industries, certain technology
companies, such as semiconductor manufacturers, frequently go through periods of
supply and demand imbalances resulting in lower profitability and weak stock
performance. In a global economy, these periods can be exacerbated by broader
concerns, such as the currency devaluations we saw in many southeast Asian
countries late this year.
Despite the short-term volatility of the sector, we believe in the long-term
attractiveness of many technology stocks. During this period, we continued to
focus on companies with such characteristics as pricing power, leading market
share and strong management teams. For example, one of our largest positions,
America Online Inc., continued to add subscribers to its customer base, thereby
increasing its position as the world's leading internet service provider.
Pricing was stable and profits expanded due to the company's more efficient
operations.
WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE FINAL SIX MONTHS OF THE
PERIOD?
Given the uncertainty in the marketplace surrounding technology stocks, we
reduced our weighting in a few companies and exited others altogether. For
example, we sold our remaining position in 3Com Corp. after its acquisition of
U.S. Robotics. The merger has been a significant drag on earnings, due to excess
modem inventory and price cuts. We did not believe this situation would correct
itself quickly and, as a result, put your money to work elsewhere. Another
position we sold was Ascend Communications. During the past six months, the
company faced increased competition in its core
TOP TEN HOLDINGS % of fund investments
As of As of
10/31/97 4/30/97
Pfizer, Inc. 3.1% 3.0%
General Electric Co. (U.S.) 2.7% 2.8%
Texas Instruments Inc. 2.7% 1.5%
Warner-Lambert Co. 2.6% 1.7%
Eli Lilly Co. 2.4% 1.7%
America Online Inc. 2.1% 0.9%
Cisco Systems Inc. 2.0% 0.4%
Time Warner Inc. 1.7% 0.5%
Dell Computer Corp. 1.7% 2.4%
Compaq Computer Corp. 1.7% 0.7%
TOP FIVE INDUSTRIES % of fund investments
As of As of
10/31/97 4/30/97
Pharmaceuticals 12.7% 16.9%
Banking 8.9% 11.1%
Financial Services 7.9% 5.0%
Electrical & Electronic Components 7.1% 11.6%
Communications Services 6.6% 3.9%
6 ULTRA AMERICAN CENTURY INVESTMENTS
ULTRA
remote access products. This resulted in a difficult pricing environment, which
decreased profitability.
Aside from adjustments to our technology weightings, there were no
significant changes to the portfolio during this period. We believe that the
portfolio is well positioned to benefit from future earnings growth at companies
that remain large holdings, such as Pfizer, Bell Atlantic Corp., General
Electric Co. and BankAmerica.
CAN YOU GIVE A FEW EXAMPLES OF NEW STOCKS ADDED DURING THE PERIOD?
We added companies to the portfolio in a variety of industries. Several
airline stocks, such as American Airlines Corp. and United Airlines Corp., were
added to the fund as it became apparent that improved ticket pricing would
continue, that business and consumer demand would stay strong, and that fuel
costs would remain stable. In addition to the positive industry trends,
companies like American used excess cash flow to reduce debt and buy back
shares, both of which improved earnings growth.
Like the airlines, cable companies have also benefited from a more positive
business environment. Most providers have raised prices this past year,
subscriber trends in many markets have started to improve, and capital
expenditures have leveled off. These events led to a more positive earnings
outlook for companies like Comcast Corp. and Tele-Communications, Inc.
WHEN THE MARKET WAS DOWN 7.18% ON OCTOBER 27, HOW DID YOU RESPOND?
It is important to stress that Ultra is managed with a time-tested,
disciplined investment philosophy. We do not change our approach during periods
of uncertainty. When the market corrected this fall, we met as a group and
discussed every name in the portfolio. We used the market correction as an
opportunity to buy selected stocks at attractive prices. We continue to view
periods of market correction as healthy and necessary.
HOW IS ULTRA POSITIONED IN A MARKET THAT IS LESS NARROWLY FOCUSED ON THE
SO-CALLED "NIFTY FIFTY" MARKET LEADERS?
Ultra continues to execute a bottoms-up approach of investing in some of the
fastest-growing large and medium-sized businesses in the market. We expect this
approach will be rewarded as this extended business cycle makes it more
difficult for many of the Nifty Fifty companies to sustain strong earnings
growth.
ANNUAL REPORT ULTRA 7
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
ULTRA
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------------------------------
COMMON STOCKS
AEROSPACE & DEFENSE--0.1%
<S> <C> <C>
200,000 Lockheed Martin Corp. $ 19,013
----------------------
AIRLINES--1.1%
1,000,000 AMR Corp.(1) 116,437
600,000 UAL Corp.(1) 52,575
1,650,000 US Airways Group Inc.(1) 77,344
----------------------
246,356
----------------------
BANKING--8.9%
2,000,000 Banc One Corp. 104,250
283,800 Bank of Boston Corp. 23,006
4,450,000 Bank of New York Co., Inc. (The) 209,428
4,650,000 BankAmerica Corp. 332,475
1,500,000 Chase Manhattan Corp. 173,063
2,841,200 Citicorp 355,328
4,000,000 First Union Corp. 196,250
1,600,000 Mellon Bank Corp. 82,500
4,800,000 NationsBank Corp. 287,400
300,000 Societe Generale ORD 40,952
1,250,000 U.S. Bancorp 127,109
----------------------
1,931,761
----------------------
BIOTECHNOLOGY--0.1%
700,000 Centocor, Inc.(1) 30,756
----------------------
BROADCASTING & MEDIA--3.3%
1,700,000 Chancellor Media Corp.(1)(2) 93,287
6,500,000 Time Warner Inc. 374,969
9,600,000 Westinghouse Electric Corp. 253,800
----------------------
722,056
----------------------
BUSINESS SERVICES & SUPPLIES--0.1%
450,000 AccuStaff, Inc.(1) 12,853
----------------------
COMMUNICATIONS EQUIPMENT--5.0%
4,400,000 CIENA Corp.(1) 242,550
1,202,000 Ericsson (L.M.) Telephone Co. ADR 53,264
4,355,000 Lucent Technologies Inc. 359,015
4,000,000 Motorola, Inc. 247,000
1,054,000 Newbridge Networks Corp.(1) 55,862
1,575,000 Nokia Corp. Cl A ADR 138,994
----------------------
1,096,685
----------------------
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------------------------------
COMMUNICATIONS SERVICES--6.6%
1,200,000 AT&T Corp. $ 58,725
3,700,000 Bell Atlantic Corp. 295,537
3,300,000 Comcast Corp. Cl A 90,544
796,900 France Telecom S.A. ADR(1) 30,182
1,375,000 Liberty Media Group Cl A(1) 47,824
2,750,000 SBC Communications Inc. 174,969
1,250,357 TCI Communications, Inc. Cl A(1) 28,875
575,000 Tel-Save Holdings, Inc.(1) 12,327
8,599,643 Tele-Communications, Inc. Cl A(1) 196,986
1,400,000 Telecomunicacoes
Brasileiras S.A. ADR 142,100
10,700,000 Worldcom, Inc.(1) 359,453
----------------------
1,437,522
----------------------
COMPUTER PERIPHERALS--4.1%
3,000,000 3Com Corp.(1) 124,406
5,150,000 Bay Networks, Inc.(1) 162,869
5,350,000 Cisco Systems Inc.(1) 438,867
3,050,000 EMC Corp. (Mass.)(1) 170,800
----------------------
896,942
----------------------
COMPUTER SOFTWARE & SERVICES--5.9%
6,059,300 America Online Inc.(1)(2) 466,566
3,550,000 BMC Software, Inc.(1)(2) 213,888
2,050,000 Computer Associates International, Inc. 152,853
1,668,900 Electronics for Imaging, Inc.(1) 77,917
387,000 Fiserv, Inc.(1) 17,245
1,560,000 Microsoft Corp.(1) 202,703
4,150,000 Oracle Systems Corp.(1) 148,492
----------------------
1,279,664
----------------------
COMPUTER SYSTEMS--6.0%
5,650,000 Compaq Computer Corp.(1) 360,188
4,501,500 Dell Computer Corp.(1) 360,964
3,600,000 International Business Machines Corp. 353,025
6,800,600 Sun Microsystems, Inc.(1)(2) 232,708
----------------------
1,306,885
----------------------
CONSUMER PRODUCTS--4.1%
1,700,000 Avon Products, Inc. 111,350
1,945,600 Colgate-Palmolive Co. 125,978
3,150,000 Gillette Company 280,546
4,120,000 Procter & Gamble Co. (The) 280,160
1,000,000 Ralston Purina Co. 89,750
----------------------
887,784
----------------------
See Notes to Financial Statements
8 ULTRA AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
ULTRA
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES--5.0%
9,000,000 General Electric Co. (U.S.) $ 581,062
5,800,000 Tyco International Ltd. 218,950
5,500,000 Unilever N.V. 293,563
----------------------
1,093,575
----------------------
ELECTRICAL & ELECTRONIC COMPONENTS--7.1%
4,732,000 Altera Corp.(1)(2) 209,835
3,269,000 Analog Devices, Inc.(1) 99,909
799,000 ASM Lithography Holding N.V.(1) 58,727
3,000,000 Intel Corp. 231,094
800,000 KLA-Tencor Corporation(1) 35,075
2,609,100 Maxim Integrated Products, Inc.(1) 172,771
1,600,000 National Semiconductor Corp.(1) 57,600
900,000 Siemens AG ORD 55,308
1,200,000 Teradyne, Inc.(1) 44,925
5,436,000 Texas Instruments Inc. 579,953
----------------------
1,545,197
----------------------
ENERGY (PRODUCTION & MARKETING)--0.7%
604,972 British Petroleum Co. plc ADR 53,086
1,450,000 Cooper Cameron Corp.(1) 104,763
----------------------
157,849
----------------------
ENERGY (SERVICES)--3.0%
1,100,000 Baker Hughes Inc. 50,531
994,500 Diamond Offshore Drilling, Inc. 61,908
400,000 Ensco International Inc. 16,825
270,000 Falcon Drilling Co. Inc.(1) 9,821
2,900,000 Global Marine Inc.(1) 90,262
1,500,000 Nabors Industries, Inc.(1) 61,688
1,050,000 Noble Drilling Corp.(1) 37,341
3,450,000 Schlumberger Ltd. 301,875
200,000 Transocean Offshore 10,800
250,000 Varco International, Inc.(1) 15,234
----------------------
656,285
----------------------
FINANCIAL SERVICES--7.9%
4,400,000 American Express Credit Corp. 343,200
2,100,000 Associates First Capital Corp. 133,612
1,800,000 Deutsche Bank AG ORD 117,602
4,600,000 Federal Home Loan Mortgage
Corporation 174,225
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------------------------------
2,400,000 Federal National Mortgage Association $ 116,250
460,000 Franklin Resources, Inc. 41,343
6,065,966 ING Groep N.V. ORD 253,761
4,500,000 MBNA Corp. 118,406
400,000 Merrill Lynch & Co., Inc. 27,050
3,100,000 Morgan Stanley, Dean Witter,
Discover & Co. 151,900
3,550,000 Travelers Group, Inc. 248,500
----------------------
1,725,849
----------------------
HEALTHCARE--0.8%
5,400,000 Healthsouth Rehabilitation Corp.(1) 138,037
819,800 Oxford Health Plans, Inc.(1) 21,187
169,600 United HealthCare Corp. 7,855
----------------------
167,079
----------------------
INDUSTRIAL EQUIPMENT & MACHINERY(3)
12,500 Mannesmann AG ORD 5,271
----------------------
INSURANCE--3.1%
1,500,000 Allstate Corp. 124,406
1,650,000 American International Group, Inc. 168,403
1,800,000 Chubb Corp. (The) 119,250
2,615,000 Conseco Inc. 114,079
700,000 ITT Hartford Group, Inc. 56,700
1,783,000 Skandia Forsakrings AB ORD 83,140
----------------------
665,978
----------------------
LEISURE--2.8%
1,000,000 Disney (Walt) Co. 82,250
2,700,000 HFS, Inc.(1) 190,350
5,419,500 Hilton Hotels Corporation 166,988
500,000 Marriott International, Inc. 34,875
5,400,000 Mirage Resorts, Inc.(1) 135,000
----------------------
609,463
----------------------
MACHINERY & EQUIPMENT--0.9%
6,169,500 Applied Materials, Inc.(1) 205,714
----------------------
MEDICAL EQUIPMENT & SUPPLIES--0.8%
1,000,000 Guidant Corp. 57,500
2,400,000 Medtronic, Inc. 104,400
410,100 Thermo Electron Corp.(1) 15,302
----------------------
177,202
----------------------
See Notes to Financial Statements
ANNUAL REPORT ULTRA 9
SCHEDULE OF INVESTMENTS
ULTRA
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------------------------------
OFFICE EQUIPMENT & SUPPLIES--1.6%
1,700,000 Danka Business Systems PLC ADR $ 62,900
3,550,000 Xerox Corp. 281,559
----------------------
344,459
----------------------
PHARMACEUTICALS--12.7%
4,050,000 Bristol-Myers Squibb Co. 355,387
800,000 Elan Corp., plc ADR(1) 39,900
1,650,000 Johnson & Johnson 94,669
7,900,000 Lilly (Eli) & Co. 528,312
2,500,000 Merck & Co., Inc. 223,125
114,000 Novartis AG ORD 178,388
9,600,000 Pfizer, Inc. 679,200
2,450,000 Teva Pharmaceutical
Industries Ltd. ADR(2) 114,461
3,950,000 Warner-Lambert Co. 565,591
----------------------
2,779,033
----------------------
RETAIL (APPAREL)--0.1%
443,700 TJX Companies, Inc. (The) 13,145
----------------------
RETAIL (FOOD & DRUG)--1.2%
1,500,000 General Nutrition Companies, Inc.(1) 47,062
3,350,000 Koninklijke Ahold NV ORD 85,461
2,005,000 Safeway Inc.(1) 116,541
500,000 Walgreen Co. 14,063
----------------------
263,127
----------------------
RETAIL (GENERAL MERCHANDISE)--2.0%
3,575,900 Costco Companies, Inc.(1) 137,225
2,050,000 Dayton Hudson Corp. 128,766
4,600,000 Wal-Mart Stores, Inc. 161,575
----------------------
427,566
----------------------
RETAIL (SPECIALTY)--0.4%
900,000 Starbucks Corp.(1)(2) 29,756
2,100,000 U.S. Office Products Co.(1) 65,363
----------------------
95,119
----------------------
TOBACCO--0.9%
4,931,700 Philip Morris Companies Inc. 195,419
----------------------
TRANSPORTATION--0.4%
3,250,000 Republic Industries, Inc.(1) 95,875
----------------------
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------------------------------
UTILITIES--0.3%
1,820,300 AES Corp. (The)(1) $ 72,129
----------------------
TOTAL COMMON STOCKS--97.0% 21,163,611
----------------------
(Cost $16,223,509)
PREFERRED STOCKS
COMMUNICATIONS SERVICES--0.2%
325,000 Worldcom, Inc. 38,208
----------------------
PRINTING & PUBLISHING--0.1%
1,500,000 News Corp. Ltd. ADR 26,625
----------------------
TOTAL PREFERRED STOCKS--0.3% 64,833
----------------------
(Cost $70,130)
TEMPORARY CASH INVESTMENTS(4)
$50,000 par value FHLB Discount Notes,
5.45%, 11/18/97 50,000
$260,000 par value FHLMC Discount Notes,
5.42% - 5.48%, 11/6/97 through 12/17/97 259,607
$45,000 par value FNMA Discount Notes,
5.46% - 5.47%, 11/24/97
through 12/24/97 44,845
Repurchase Agreement, BA Security Services,
Inc., (U.S. Treasury obligations), in a joint trading
account at 5.65%, dated 10/31/97,
due 11/3/97 (Delivery value $148,070) 148,000
Repurchase Agreement, Goldman Sachs & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 10/31/97,
due 11/3/97 (Delivery value $79,237) 79,200
----------------------
TOTAL TEMPORARY CASH INVESTMENTS--2.7% 581,652
----------------------
(Cost $581,237)
TOTAL INVESTMENT SECURITIES--100.0% $21,810,096
======================
(Cost $16,874,876)
See Notes to Financial Statements
10 ULTRA AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
ULTRA
OCTOBER 31, 1997
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contracts Settlement Unrealized
to Sell Dates Value Loss
- -----------------------------------------------------------------------------------------------
200,380,205 CHF 11/28/97 $ 143,353 $(2,354)
273,505,183 DEM 11/28/97 158,637 (1,464)
326,573,128 FRF 11/28/97 56,510 (309)
37,619,091 GBP 11/28/97 62,939 (341)
1,064,758,310 NLG 11/28/97 547,321 (1,322)
652,367,606 SEK 11/28/97 86,985 (262)
-----------------------------------------
$1,055,745 $(6,052)
=========================================
(Value on Settlement Date $1,061,797)
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
CHF = Swiss Franc
DEM = German Mark
FHLB = Federal Home Loan Bank
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
FRF = French Franc
GBP = British Pound
NLG = Netherlands Guilder
ORD = Foreign Ordinary Share
SEK = Swedish Krona
(1) Non-income producing.
(2) Affiliated Company: represents ownership of at least 5% of the voting
securities of the issuer and is, therefore, an affiliate as defined in the
Investment Company Act of 1940. (See Note 5 in Notes to Financial
Statements for a summary of transactions for each issuer which is or was
an affiliate at or during the year ended October 31, 1997.)
(3) Industry is less than 0.05% of the Fund's total investment securities.
(4) The rates for U.S. Government Agency discount notes are the yield to
maturity at purchase.
See Notes to Financial Statements
ANNUAL REPORT ULTRA 11
<TABLE>
<CAPTION>
VISTA
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS LIFE OF FUND
INVESTOR CLASS (inception 11/25/83)
<S> <C> <C> <C> <C> <C> <C>
Vista ........................ 26.68% 0.29% 15.65% 13.65% 15.62% 12.92%
Russell 2500 Growth .......... 26.57% 21.85% 20.57% 17.22% 15.95% --(2)
ADVISOR CLASS (inception 10/2/96)
Vista ........................ 26.53% 0.15% ..................................................... -6.47%
Russell 2500 Growth .......... 26.57% 21.85% ..................................................... 16.54%(3)
INSTITUTIONAL CLASS (inception 11/14/96)
Vista ........................ 26.83% ..................................................................... 0.17%
Russell 2500 Growth .......... 26.57% ..................................................................... 17.54%(4)
</TABLE>
- ----------
(1) Returns for periods less than one year are not annualized.
(2) Not available. Index data begins in 1986.
(3) For the period from 9/30/96 (the date nearest the class's inception for
which data are available) to 10/31/97.
(4) For the period from 11/30/96 (the date nearest the class's inception for
which data are available) to 10/31/97.
See pages 35, 36 and 37 for more information about share classes, the
comparative indices and returns.
[line graph - data below]
GROWTH OF $10,000 OVER 10 YEARS (Investor Class) $10,000 investment made
10/31/97
VISTA RUSSELL 2500
GROWTH INDEX
10/31/87 $10,000 $10,000
10/31/88 $11,141 $12,196
10/31/89 $16,511 $14,998
10/31/90 $12,848 $11,601
10/31/91 $21,543 $19,414
10/31/92 $22,525 $19,849
10/31/93 $26,515 $24,609
10/31/94 $27,618 $25,066
10/31/95 $39,825 $30,947
10/31/96 $42,596 $36,055
10/31/97 $42,721 $43,933
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. Data quoted is for Investor Class only; performance for other
classes will vary due to differences in fee structures (see the Total Returns
table above).
The line representing Vista's total return includes operating expenses (such as
transaction costs and management fees) that reduce returns, while the total
return line of the Russell 2500 Growth Index does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Companies 59 61
Median Price/Earnings Ratio 32.1 53.9
Portfolio Turnover 96% 91%
Expense Ratio (for Investor Class) 1.00% 0.99%
12 VISTA AMERICAN CENTURY INVESTMENTS
VISTA
MANAGEMENT Q & A
An interview with Glenn Fogle, portfolio manager on the Vista investment
team. Note: All fund returns referenced in this interview are for Investor Class
shares.
HOW DID THE FUND PERFORM?
For the year ended October 31, 1997, Vista's total return was a
disappointing 0.29%. The fund's benchmark, the Russell 2500 Growth index,
returned 21.85% for the year. In the last six months, the fund recovered
dramatically, with an impressive 26.68% gain, compared to 26.57% for its
benchmark. However, that strong performance was offset by the fund's losses in
the prior six-month period.
Price volatility is a fact of life among small and midsize stocks. Still,
this year was exceptional. In the first half of the period, large-cap stocks
outperformed the stocks of smaller companies by a wide margin. In addition,
performance was restricted to a fairly small group of stocks in each
capitalization category. In the second half, the stocks of smaller companies
rebounded sharply. The fund edged ahead of its benchmark as investors gained
confidence in the high growth companies in which Vista invests.
WHAT ATTRACTED INVESTORS TO MID- AND SMALL-CAP GROWTH STOCKS?
Two things seemed responsible. Several high profile, large-cap companies,
including Coca-Cola and Gillette, announced disappointing earnings for the
second quarter. This gave investors a heads-up that even global consumer
franchises can stumble. Secondly, investors started to regain confidence in the
earnings prospects of the high-growth companies we buy. The fourth quarter of
1996 and the first of 1997 were frustrating for us because, although many of our
holdings met very high earnings expectations, investors doubted such growth
could persist. As these companies continued to hit earnings targets in the
second quarter, investors became more willing to pay the premium that high
growth
[bar chart - data below]
VISTA'S ONE-YEAR RETURNS (Periods ended October 31)
VISTA Russell 2500
Growth
10/31/88 11.41% 21.96%
10/31/89 48.19% 22.98%
10/31/90 -22.17% -22.65%
10/31/91 67.67% 67.34%
10/31/92 4.55% 2.24%
10/31/93 17.71% 23.98%
10/31/94 4.16% 1.86%
10/31/95 44.20% 23.46%
10/31/96 6.96% 16.51%
10/31/97 0.29% 21.85%
This chart illustrates the fund's returns over the past 10 years and compares
them with the returns of the Russell 2500 Growth Index. Vista's total returns
include operating expenses, while the Russell 2500 Growth Index's returns do
not. See page 36 for a description of the index. Past performance is no
guarantee of future results. Investment return and principal value will
fluctuate, and redemption value may be more or less than original cost.
*Investor Class.
ANNUAL REPORT VISTA 13
VISTA
companies ordinarily command, especially since the premium had fallen over the
past year.
Many Vista holdings that were hardest hit in the first half of the fiscal
year were the strongest contributors in the second half, affirming our decision
to hold onto fast-growing companies despite short-term investor disaffection.
HOW DID YOU RESPOND TO THE MARKET'S 7.18% DROP ON OCTOBER 27?
We checked on each of our holdings to see if there was any reason to doubt
our confidence in their business prospects, and we added to those that had
dropped to very attractive prices. We saw no reason to join a market move driven
by psychological fears rather than economic factors.
WHAT STOCKS OR SECTORS ADDED MOST TO THE FUND'S STRONG RETURN FOR THE LAST SIX
MONTHS OF THE PERIOD?
The fund held a large weighting in energy service stocks due to the growth
in earnings we saw coming in that sector. These stocks, many of which were
purchased during the first half of the fiscal year, were the strongest
contributors during the second half. New technology is enabling oil and gas
companies to more accurately find--and more efficiently extract--reserves. Our
holdings included firms that supply energy companies with both land and offshore
rigs and boats to service offshore operations. The number of drilling rigs is
down by half compared to 10 years ago and the cost and time to build new
equipment is significant, giving tremendous pricing power to rig service
companies.
Among our other top performers were specialty software companies, including
HBO & Company and Hyperion Software Corp. HBO provides software to help
hospitals manage back-office administrative functions, track clinical data and
manage patient information flow. Hyperion, a firm that provides financial
accounting software, benefited from signing an agreement with a large
international partner.
WHAT STOCKS OR SECTORS DETRACTED FROM FUND PERFORMANCE?
Stocks that hurt performance in the second half of the year included Data
General Corp. and Sequent Computer Systems, both of which manufacture computer
servers. Both are making a transition to a new technology, generating
uncertainty about their near-term prospects. Customers are deferring purchases
until the transition is complete, which should occur in the first quarter.
PairGain Technologies also was disappointing. The company sells products that
increase the speed and information- carrying capacity of copper
TOP TEN HOLDINGS % of fund investments
As of As of
10/31/97 4/30/97
USA Waste Services, Inc. 3.6% 3.4%
Sanmina Corp. 3.1% 2.7%
Jabil Circuit, Inc. 3.0% 1.6%
Hyperion Software Corp. 2.9% 1.4%
Centocor, Inc. 2.8% 2.0%
HBO & Co. 2.7% 2.9%
Smith International, Inc. 2.6% 2.2%
Stage Stores, Inc. 2.5% --
Tidewater Inc. 2.5% 2.2%
U.S. Filter Corp. 2.5% 2.3%
TOP FIVE INDUSTRIES % of fund investments
As of As of
10/31/97 4/30/97
Electrical & Electronic Components 17.2% 7.0%
Energy (Services) 14.1% 10.0%
Communications Equipment 7.9% 10.4%
Biotechnology 7.5% 4.9%
Computer Software & Services 7.4% 13.0%
14 VISTA AMERICAN CENTURY INVESTMENTS
VISTA
phone wires. The stock declined in the face of a price war initiated by
competitors responding to PairGain's dominance of the market.
WHAT CHANGES DID YOU MAKE IN THE FUND'S INVESTMENT STRATEGY OR HOLDINGS DURING
THE SIX MONTHS ENDED OCTOBER 31, 1997?
We increased our holdings in energy services from 10% at April 30, 1997, to
14.1% six months later for the reasons described earlier. In addition, we
continued to add to high-tech contract manufacturers, which are included in the
electrical and electronic components category. Examples include Jabil Circuit,
Inc. and Sanmina Corporation, which are benefiting from decisions by computer
and telecommunications companies to outsource circuit board manufacturing and
systems assembly to specialist companies.
Retailers were another group that we added to over the summer. In the early
1990s, the proliferation of shopping malls led to excess retail capacity. In the
mid-1990s, there was a winnowing out of the weaker players. The remaining
companies are benefiting from better inventory control and less competition.
Within this segment, we are finding the strongest earnings growth among discount
and off-price retailers.
On the sell side, we trimmed the fund's holdings of software companies,
retaining those companies with the strongest earnings acceleration.
HAVE THERE BEEN ANY CHANGES IN THE FUND'S MANAGEMENT TEAM?
Yes, Arnold Douville has joined us as vice president and portfolio manager.
Previously, Arnold was senior portfolio manager for Munder Capital Management,
where he spent the last eight years and was responsible for the mid-cap growth
effort. Portfolio manager John Seitzer, who has been on the Vista team for four
years, will leave Vista to focus on management of Giftrust and New
Opportunities, two funds with smaller capitalization ranges.
DO YOU SEE THE SHIFT IN FAVOR TOWARD SMALL- AND MID-CAP STOCKS CONTINUING?
The market is not yet in love with small and mid-cap growth stocks, but at
least it no longer hates them. In other words, from October, 1996, through
March, 1997, investors seemed bent on reducing their exposure to smaller stocks.
The selling pressure caused these stocks to badly trail large-cap indices and in
the process created some very attractive opportunities. The market's preference
has now broadened to include the rest of the market, which is an improvement but
hardly a major shift in sentiment. However, if the large-cap stocks that have
led the market for three years continue to see slower earnings growth, we would
expect investors to become more interested in smaller stocks with more robust
earnings growth.
ANNUAL REPORT VISTA 15
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
VISTA
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- -----------------------------------------------------------------------------------------
COMMON STOCKS
BIOTECHNOLOGY--7.5%
<S> <C> <C>
600,000 Agouron Pharmaceuticals, Inc.(1) $ 27,337
846,000 BioChem Pharma Inc.(1) 21,203
1,200,000 Centocor, Inc.(1) 52,725
650,000 IDEC Pharmaceuticals Corp.(1)(2) 24,822
270,000 Protein Design Labs, Inc.(1) 13,365
------------------
139,452
------------------
BUSINESS SERVICES & SUPPLIES--5.4%
299,200 AccuStaff, Inc.(1) 8,546
1,000,000 Corrections Corp. of America(1) 30,500
200,000 Quintiles Transnational Corp.(1) 14,538
1,150,000 U.S. Filter Corp.(1) 46,143
------------------
99,727
------------------
COMMUNICATIONS EQUIPMENT--7.9%
1,350,000 Brightpoint, Inc.(1)(2) 44,466
750,000 Comverse Technology, Inc.(1)(2) 30,843
2,100,000 P-COM, Inc.(1)(2) 42,000
1,600,000 Scientific-Atlanta, Inc. 29,700
------------------
147,009
------------------
COMMUNICATIONS SERVICES--2.2%
670,000 Qwest Communications
International Inc.(1) 41,414
------------------
COMPUTER SOFTWARE & SERVICES--7.4%
1,170,000 HBO & Co. 50,822
1,400,000 Hyperion Software Corp.(1)(2) 53,200
673,000 McAfee Associates, Inc.(1) 33,440
------------------
137,462
------------------
COMPUTER SYSTEMS--2.8%
940,000 Data General Corp.(1) 18,095
1,650,000 Sequent Computer Systems, Inc.(1) 34,495
------------------
52,590
------------------
ELECTRICAL & ELECTRONIC
COMPONENTS--17.2%
1,212,800 Jabil Circuit, Inc.(1) 54,803
252,400 Lattice Semiconductor Corp.(1) 12,596
800,000 Level One Communications, Inc.(1) 35,800
505,000 Linear Technology Corp. 31,720
740,000 Microchip Technology Inc.(1) 29,369
Shares ($ in Thousands) Value
- ------------------------------------------------------------------------------------------
770,000 Sanmina Corp.(1)(2) $ 57,558
180,000 SMART Modular Technologies, Inc.(1) 8,944
1,050,000 Solectron Corp.(1) 41,213
265,000 Uniphase Corp.(1) 17,606
650,000 Vitesse Semiconductor Corp.(1) 28,234
------------------
317,843
------------------
ENERGY (SERVICES)--14.1%
200,000 Atwood Oceanics, Inc.(1) 22,150
563,000 Diamond Offshore Drilling, Inc. 35,047
1,069,000 Marine Drilling Companies, Inc.(1) 31,636
600,000 Petroleum Geo-Services A/S ADR(1) 41,550
725,000 Sante Fe International 35,661
637,000 Smith International, Inc.(1) 48,571
710,000 Tidewater Inc. 46,638
------------------
261,253
------------------
ENVIRONMENTAL SERVICES--5.2%
900,000 Browning-Ferris Industries, Inc. 29,250
1,800,000 USA Waste Services, Inc.(1) 66,600
------------------
95,850
------------------
FINANCIAL SERVICES--2.1%
900,000 Green Tree Financial Corp. 37,913
------------------
HEALTHCARE--2.8%
1,153,680 Concentra Managed Care, Inc.(1) 37,567
322,500 Health Management Associates, Inc.(1) 7,861
267,300 Oxford Health Plans, Inc.(1) 6,908
------------------
52,336
------------------
MACHINERY & EQUIPMENT--1.3%
175,000 Diebold, Inc. 7,711
450,000 PRI Automation, Inc.(1) 17,156
------------------
24,867
------------------
MEDICAL EQUIPMENT & SUPPLIES--0.5%
175,000 Arterial Vascular Engineering, Inc.(1) 9,286
------------------
PHARMACEUTICALS--5.2%
425,000 Dura Pharmaceuticals, Inc.(1)(2) 20,586
655,000 Jones Medical Industries, Inc. 19,650
161,300 McKesson Corp. 17,310
810,000 Medicis Pharmaceutical Corp.(1)(2) 38,728
------------------
96,274
------------------
See Notes to Financial Statements
16 VISTA AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
VISTA
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- ------------------------------------------------------------------------------------------
RESTAURANTS--2.1%
950,000 CKE Restaurants, Inc. $ 37,941
------------------
RETAIL (APPAREL)--6.8%
790,000 Jones Apparel Group, Inc.(1) 40,191
1,052,000 Ross Stores, Inc. 39,450
1,300,000 Stage Stores, Inc.(1) 47,125
------------------
126,766
------------------
RETAIL (GENERAL MERCHANDISE)--4.6%
1,037,500 Consolidated Stores Corp.(1) 41,370
300,000 Dayton Hudson Corp. 18,844
375,200 Dillard Department Stores, Inc. Cl A 14,398
155,000 Kohl's Corp.(1) 10,404
------------------
85,016
------------------
RETAIL (SPECIALTY)--1.1%
250,000 Corporate Express, Inc.(1) 3,672
350,000 Fastenal Company 17,194
------------------
20,866
------------------
TOTAL COMMON STOCKS--96.2% 1,783,865
------------------
(Cost $1,335,293)
TEMPORARY CASH INVESTMENTS--3.8%
Repurchase Agreement, Morgan (J.P.) & Co. Inc.,
(U.S. Treasury obligations), in a joint trading
account at 5.66%, dated 10/31/97, due
11/3/97 (Delivery value $70,033)
(Cost $70,000) 70,000
-----------------
TOTAL INVESTMENT SECURITIES--100.0% $1,853,865
=================
(Cost $1,405,293)
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
(1) Non-income producing.
(2) Affiliated Company: represents ownership of at least 5% of the voting
securities of the issuer and is, therefore, an affiliate as defined in the
Investment Company Act of 1940. (See Note 5 in Notes to Financial
Statements for a summary of transactions for each issuer which is or was
an affiliate at or during the year ended October 31, 1997.)
See Notes to Financial Statements
ANNUAL REPORT VISTA 17
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
ULTRA VISTA
ASSETS ($ in Thousands Except Per-Share Amounts)
<S> <C> <C>
Investment securities, at value (identified cost of $16,874,876
and $1,405,293, respectively) (Note 3 and Note 5) ................... $21,810,096 $1,853,865
Foreign currency holdings, at value (identified cost of $4,627) ........ 4,627 --
Cash ................................................................... 36,278 5,908
Receivable for investments sold ........................................ 500,058 52,007
Dividends and interest receivable ...................................... 14,019 81
------------- --------------
22,365,078 1,911,861
------------- --------------
LIABILITIES
Disbursements in excess of demand deposit cash ......................... 10,869 2,228
Payable for forward foreign currency exchange contracts ................ 6,052 --
Payable for investments purchased ...................................... 588,442 58,534
Payable for capital shares redeemed .................................... 14,203 1,153
Accrued management fees (Note 2) ....................................... 19,574 1,718
Distribution fees payable (Note 2) ..................................... 7 2
Service fees payable (Note 2) .......................................... 7 2
Other liabilities ...................................................... 8 2
------------- --------------
639,162 63,639
------------- --------------
Net Assets ............................................................. $21,725,916 $1,848,222
============= ==============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus). ............................... $12,216,459 $1,304,158
Undistributed net investment income .................................... 12,202 --
Accumulated undistributed net realized gain on investment
and foreign currency transactions ................................... 4,568,150 95,492
Net unrealized appreciation on investments and
translation of assets and liabilities
in foreign currencies (Note 3) ...................................... 4,929,105 448,572
------------- --------------
$21,725,916 $1,848,222
============= ==============
Investor Class, $0.01 Par Value ($ and shares in full)
Net assets ............................................................. $21,694,755,441 $1,828,088,457
Shares outstanding ..................................................... 648,317,186 125,824,643
Net asset value per share .............................................. $33.46 $14.53
Advisor Class, $0.01 Par Value ($ and shares in full)
Net assets ............................................................. $30,826,983 $6,553,268
Shares outstanding ..................................................... 924,006 452,023
Net asset value per share .............................................. $33.36 $14.50
Institutional Class, $0.01 Par Value ($ and shares in full)
Net assets ............................................................. $333,849 $13,580,664
Shares outstanding ..................................................... 9,957 932,737
Net asset value per share .............................................. $33.53 $14.56
</TABLE>
See Notes to Financial Statements
18 STATEMENTS OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
ULTRA VISTA
INVESTMENT INCOME ($ in Thousands)
Income:
<S> <C> <C>
Dividends (net of foreign taxes withheld of $2,736 and $0, respectively) ... $192,754 $1,773
Interest ................................................................... 19,425 3,472
------------- --------------
212,179 5,245
------------- --------------
Expenses (Note 2):
Management fees ............................................................ 204,741 19,603
Distribution fees - Advisor Class .......................................... 50 16
Shareholder service fees - Advisor Class ................................... 50 16
Directors' fees and expenses ............................................... 208 19
------------- --------------
205,049 19,654
------------- --------------
Net investment income (loss) ............................................... 7,130 (14,409)
------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain on:
Investments. ...............................................................4,603,466 96,402
Foreign currency transactions .............................................. 6,202 --
------------- --------------
4,609,668 96,402
------------- --------------
Change in net unrealized appreciation on:
Investments ................................................................(1,011,026) (87,061)
Translation of assets and liabilities in foreign currencies ................ (7,133) --
------------- --------------
(1,018,159) (87,061)
------------- --------------
Net realized and unrealized gain on investments ............................3,591,509 9,341
------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations ............$3,598,639 $(5,068)
============= ==============
</TABLE>
See Notes to Financial Statements
ANNUAL REPORT STATEMENTS OF OPERATIONS 19
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
ULTRA VISTA
YEARS ENDED OCTOBER 31, 1997
AND OCTOBER 31, 1996
Increase (Decrease) in Net Assets 1997 1996 1997 1996
OPERATIONS ($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income (loss) .............................. $7,130 $(31,468) $(14,409) $(14,784)
Net realized gain on investments and foreign
currency transactions .................................... 4,609,668 1,037,212 96,402 171,813
Change in net unrealized appreciation on investments
and translation of assets and liabilities
in foreign currencies ..................................... (1,018,159) 777,976 (87,061) (24,182)
------------- -------------- ------------- --------------
Net increase (decrease) in net assets
resulting from operations ................................. 3,598,639 1,783,720 (5,068) 132,847
------------- -------------- ------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gains from investment transactions:
Investor Class ........................................... (1,044,611) (673,603) (168,260) (111,473)
Advisor Class ............................................ (778) -- (449) --
Institutional Class ...................................... (547) -- (225) --
In excess of net realized gain:
Investor Class ........................................... -- (9,858) -- (1,791)
------------- -------------- ------------- --------------
Decrease in net assets from distributions ................. (1,045,936) (683,461) (168,934) (113,264)
------------- -------------- ------------- --------------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase (decrease) in net assets from
capital share transactions ............................... 894,267 2,802,785 (259,254) 585,978
------------- -------------- ------------- --------------
Net increase (decrease) in net assets ..................... 3,446,970 3,903,044 (433,256) 605,561
NET ASSETS
Beginning of year ......................................... 18,278,946 14,375,902 2,281,478 1,675,917
------------- -------------- ------------- --------------
End of year ............................................... $21,725,916 $18,278,946 $1,848,222 $2,281,478
============= ============== ============= ==============
Undistributed net investment income ....................... $12,181 -- -- --
============= ============== ============= ==============
</TABLE>
See Notes to Financial Statements
20 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century--Twentieth Century Ultra Fund
(Ultra) and American Century--Twentieth Century Vista Fund (Vista) (the Funds)
are two of the thirteen series of funds issued by the Corporation. The Funds'
investment objective is to seek capital growth by investing primarily in equity
securities. Ultra intends to pursue its objective by investing in medium and
large size companies, while Vista invests in medium size and small companies.
The Funds are authorized to issue three classes of shares: the Investor Class,
the Advisor Class, and the Institutional Class. The three classes of shares
differ principally in their respective shareholder servicing and distribution
expenses and arrangements. All shares of each Fund represent an equal pro rata
interest in the assets of the class to which such shares belong, and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except for class specific expenses and exclusive rights to vote on
matters affecting only individual classes. The following significant accounting
policies, related to all classes of the Funds, are in accordance with accounting
policies generally accepted in the investment company industry.
SECURITY VALUATIONS -- Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through valuations obtained
from a commercial pricing service or at the mean of the most recent bid and
asked prices. When valuations are not readily available, securities are valued
at fair value as determined in accordance with procedures adopted by the Board
of Directors.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME -- Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of discounts and premiums.
FOREIGN CURRENCY TRANSACTIONS -- The accounting records of the Funds are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
investment securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of investment securities are a component of
realized gain (loss) on investments and unrealized appreciation (depreciation)
on investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS -- The Funds may enter into
forward foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Funds will segregate assets in an amount sufficient to cover their
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Funds and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Funds
bear the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS -- The Funds may enter into repurchase agreements with
institutions that the Funds' investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. Each Fund requires that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable
each Fund to obtain those securities in the event of a default under the
repurchase agreement. ACIM monitors, on a daily basis, the value of the
securities transferred to ensure the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to each Fund under each repurchase agreement.
JOINT TRADING ACCOUNT -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, each Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 21
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
INCOME TAX STATUS -- It is the policy of the Funds to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions to shareholders are recorded
on the ex-dividend date. Distributions from net investment income and net
realized gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
ADDITIONAL INFORMATION -- Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc. (ACIS), and the Corporation's transfer agent, American Century
Services Corporation.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of increases and decreases in
net assets from operations during the reporting period. Actual results could
differ from those estimates.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Funds with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Funds, except brokerage commissions, taxes, interest, expenses
of those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on each Fund's class average daily closing net assets during the previous month.
The annual management fee is 1.00%, 0.75% and 0.80% for the Investor, Advisor,
and Institutional Classes, respectively.
The Board of Directors has adopted a shareholder services and distribution
plan for the Advisor Class, pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Advisor Class Master Distribution and Shareholder Services Plan
provides that the Funds will pay ACIM an annual distribution fee equal to 0.25%
and service fee equal to 0.25%. The fees are computed daily and paid monthly
based on the Advisor Class's average daily closing net assets during the
previous month. The distribution fee provides compensation for distribution
expenses incurred by financial intermediaries in connection with distributing
shares of the Advisor Class including, but not limited to, payments to brokers,
dealers, and financial institutions that have entered into sales agreements with
respect to shares of the Funds. The service fee provides compensation for
shareholder and administrative services rendered by ACIM, its affiliates or
independent third party providers. Fees incurred under the Master Distribution
and Shareholder Services Plan during the year ended October 31, 1997, were
$100,921 for Ultra and $31,544 for Vista.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for
the year ended October 31, 1997, for Ultra and Vista totaled $21,342,093,931 and
$1,812,475,709, respectively. Sales of investment securities, excluding
short-term investments, totaled $21,899,972,196 and $2,222,040,840,
respectively.
As of October 31, 1997, accumulated net unrealized appreciation for Ultra
and Vista was $4,904,076,352 and $444,550,401, respectively, based on the
aggregate cost of investments for federal income tax purposes of $16,906,020,034
and $1,409,314,376, respectively. Accumulated net unrealized appreciation
consisted of unrealized appreciation of $5,095,554,773 and $511,593,433 for
Ultra and Vista, respectively, and unrealized depreciation of $191,478,421 and
$67,043,032, respectively.
22 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
There are 750,000,000 shares of the Investor Class, 312,500,000 shares of
the Advisor Class, and 125,000,000 shares of the Institutional Class authorized
for issuance in Ultra. There are 500,000,000 shares of the Investor Class,
210,000,000 shares of the Advisor Class, and 80,000,000 shares of the
Institutional Class authorized for issuance in Vista. Transactions in shares of
the Funds were as follows:
<TABLE>
ULTRA VISTA
Shares Amount Shares Amount
INVESTOR CLASS (In Thousands)
Year ended October 31, 1997
<S> <C> <C> <C> <C>
Sold ................................................... 189,167 $ 5,961,963 77,210 $ 1,099,918
Issued in reinvestment of distributions ................ 35,345 1,024,466 11,437 164,509
Redeemed ............................................... (194,910) (6,109,186) (107,997) (1,538,006)
----------- ----------- ----------- -----------
Net increase (decrease) ................................ 29,602 $ 877,243 (19,350) $ (273,579)
=========== =========== =========== ===========
INVESTOR CLASS
Year ended October 31, 1996
Sold ................................................... 194,099 $ 5,275,609 92,373 $ 1,404,556
Issued in reinvestment of distributions ................ 26,782 669,557 7,805 109,657
Redeemed ............................................... (114,976) (3,155,542) (61,545) (934,295)
----------- ----------- ----------- -----------
Net increase ........................................... 105,905 $ 2,789,624 38,633 $ 579,918
=========== =========== =========== ===========
ADVISOR CLASS
Year ended October 31, 1997
Sold ................................................... 793 $ 25,705 389 $ 5,265
Issued in reinvestment of distributions ................ 27 778 31 449
Redeemed ............................................... (338) (10,568) (328) (4,446)
----------- ----------- ----------- -----------
Net increase ........................................... 482 $ 15,915 92 $ 1,268
=========== =========== =========== ===========
ADVISOR CLASS
October 2, 1996(1) through October 31, 1996
Sold ................................................... 443 $ 13,191 364 $ 6,124
Redeemed ............................................... (1) (30) (4) (64)
----------- ----------- ----------- -----------
Net increase ........................................... 442 $ 13,161 360 $ 6,060
=========== =========== =========== ===========
INSTITUTIONAL CLASS
November 14, 1996(2) through October 31, 1997
Sold ................................................... 334 $ 10,284 1,145 $ 15,662
Issued in reinvestment of distributions ................ 19 547 16 226
Redeemed ............................................... (343) (9,722) (228) (2,831)
----------- ----------- ----------- -----------
Net increase ........................................... 10 $ 1,109 933 $ 13,057
=========== =========== =========== ===========
</TABLE>
- ----------
(1) Commencement of sale of the Advisor Class
(2) Commencement of sale of the Institutional Class.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 23
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
5. AFFILIATED COMPANY TRANSACTIONS
A summary of transactions for each issuer which is or was an affiliate at or
during the year ended October 31, 1997, follows:
<TABLE>
Share Realized October 31, 1997
Balance Purchase Sales Gain Share Market
Fund/Issuer 10/31/96 Cost Cost (Loss) Income Balance Value
ULTRA ($ in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Altera Corp. -- $ 352,056 $ 149,646 $ (13,773) -- 4,732,000(1) $ 209,835
America Online Inc. -- 369,876 63,402 18,029 -- 6,059,300 466,566
Ascend Communications, Inc. 11,288,000 192,344 505,305 289,117 -- -- --
BMC Software, Inc. 2,675,000 20,935 80,900 26,755 -- 3,550,000(1) 213,888
C-Cube Microsystems Inc. 2,750,000 -- 102,346 (21,386) -- -- --
Cascade Communications Corp. 7,450,000 -- 107,335 174,582 -- -- --
Citrix Systems, Inc. 1,900,000 -- 73,263 (31,276) -- -- --
DSP Communications, Inc. -- 57,346 57,346 (36,516) -- -- --
Chancellor Media Corp.(2) 2,172,500 -- 51,271 2,593 -- 1,700,000 93,287
FORE Systems, Inc. 4,900,000 -- 84,775 61,992 -- -- --
Iomega Corporation 7,300,000 -- 111,863 35,496 -- -- --
Lam Research Corp. -- 93,792 93,792 (31,207) -- -- --
LSI Logic Corp. -- 301,177 301,177 (20,562) -- -- --
Novellus Systems, Inc. -- 127,347 127,347 (44,860) -- -- --
Peoplesoft, Inc. 2,900,000 -- 81,015 164,390 -- -- --
Seagate Technology, Inc. 2,350,000 80,178 229,144 25,795 -- -- --
Starbucks Corp. 4,000,000 -- 87,507 16,845 -- 900,000 29,756
Storage Technology Corp. 2,550,000 27,665 125,865 5,335 -- -- --
Sun Microsystems, Inc. 13,450,000 -- 382,331 226,780 -- 6,800,600(1) 232,708
Teva Pharmaceutical
Industries Ltd. ADR -- 156,245 22,903 (3,006) $ 564 2,450,000 114,461
U.S. Robotics Corp. 6,600,000 -- 159,325 219,154 -- -- --
Western Digital Corp. -- 241,875 241,875 10,263 -- -- --
----------- ----------- ----------- ----------- -----------
$ 2,020,836 $ 3,239,733 $ 1,074,540 $ 564 $ 1,360,501
=========== =========== =========== =========== ===========
VISTA
- ------------------------------------------------------------------------------------------------------------------------------------
Aspen Technology, Inc. 500,000 -- $ 23,569 $ 8,737 -- -- --
Brightpoint, Inc. -- $ 40,396 11,119 3,225 -- 1,350,000(1) $ 44,466
Cognos Incorporated 2,250,000 -- 24,924 39,054 -- -- --
Comverse Technology, Inc. 1,650,000 3,908 35,670 10,037 -- 750,000 30,843
Dura Pharmaceuticals, Inc. 2,200,000 -- 33,421 39,141 -- 425,000 20,586
Employee Solutions, Inc. 2,600,000 -- 42,840 (9,102) -- -- --
Hyperion Software Corp. -- 32,350 -- -- -- 1,400,000 53,200
IDEC Pharmaceuticals Corp. 1,000,000 4,006 9,872 (324) -- 650,000 24,822
Medicis Pharmaceutical Corp. 450,000 37,235 20,695 10,146 -- 810,000(1) 38,728
Oregon Metallurgical Corp. 754,600 3,342 23,125 (5,850) -- -- --
P-COM, Inc. 850,000 6,242 -- -- -- 2,100,000(1) 42,000
PairGain Technologies, Inc. 2,200,000 -- 51,536 65,355 -- -- --
Rational Software Corp. 2,200,000 -- 47,736 (11,780) -- -- --
Sanmina Corp. 387,500 27,112 7,386 2,186 -- 770,000 57,558
Whole Foods Market, Inc. 950,000 -- 30,128 (8,993) -- -- --
---------- ---------- -------- ---------- ----------
$ 154,591 $ 362,021 $141,832 -- $ 312,203
========== ========== ======== ========== ==========
</TABLE>
- ----------------
(1) Includes adjustments for shares received from stock split and/or stock
spinoff during the period.
(2) Formerly known as Evergreen Media Corporation.
24 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ULTRA
For a Share Outstanding Throughout the Years Ended October 31
Investor Class
1997 1996 1995 1994 1993
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ...................... $29.52 $28.03 $21.16 $21.61 $15.46
---------- ----------- ----------- ---------- ----------
Income From Investment Operations
Net Investment Income (Loss) ......................... 0.01(1) (0.05)(1) (0.07)(1) (0.03) (0.09)
Net Realized and Unrealized Gain (Loss)
on Investment Transactions ........................... 5.62 2.84 7.58 (0.42) 6.24
---------- ----------- ----------- ---------- ----------
Total From Investment Operations ..................... 5.63 2.79 7.51 (0.45) 6.15
---------- ----------- ----------- ---------- ----------
Distributions
From Net Realized Gains on Investment Transactions ... (1.69) (1.19) (0.64) -- --
Distributions in Excess of Net Realized Gains ........ -- (0.11) -- -- --
---------- ----------- ----------- ---------- ----------
Total Distributions .................................. (1.69) (1.30) (0.64) -- --
---------- ----------- ----------- ---------- ----------
Net Asset Value, End of Year ............................ $33.46 $29.52 $28.03 $21.16 $21.61
========== =========== =========== ========== ==========
Total Return(2) ...................................... 19.95% 10.79% 36.89% (2.08)% 39.78%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ....... 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets .... 0.03% (0.20)% (0.30)% (0.10)% (0.60)%
Portfolio Turnover Rate ................................. 107% 87% 87% 78% 53%
Average Commission Paid per
Investment Security Traded .............................. $0.0398 $0.0350 $0.0330 --(3) --(3)
Net Assets, End of Year (in millions) ................... $21,695 $18,266 $14,376 $10,344 $8,037
</TABLE>
- ----------
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Disclosure of average commission paid per investment security traded was
not required prior to the year ended October 31, 1995.
See Notes to Financial Statements
ANNUAL REPORT FINANCIAL HIGHLIGHTS 25
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
ULTRA
For a Share Outstanding Throughout the Year Ended October 31 (except as noted)
Advisor Class
1997 1996(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period .................................. $29.52 $29.55
---------- -----------
Income From Investment Operations
Net Investment Loss(2) ............................................ (0.07) (0.02)
Net Realized and Unrealized Gain (Loss) on Investment Transactions .. 5.60 (0.01)
---------- -----------
Total From Investment Operations .................................... 5.53 (0.03)
---------- -----------
Distributions
From Net Realized Gains on Investment Transactions .................. (1.69) --
---------- -----------
Net Asset Value, End of Period ........................................ $33.36 $29.52
========== ===========
Total Return(3) ..................................................... 19.59% (0.10)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ..................... 1.25% 1.25%(4)
Ratio of Net Investment Income to Average Net Assets .................. (0.22)% (0.80)%(4)
Portfolio Turnover Rate ............................................... 107% 87%
Average Commission Paid per Investment Security Traded ................ $0.0398 $0.0350
Net Assets, End of Period (in millions) ............................... $31 $13
</TABLE>
- ----------
(1) October 2, 1996 (commencement of sale) through October 31, 1996.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
26 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS
ULTRA
For a Share Outstanding Throughout the Period Ended as Indicated
Institutional
Class
1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ................................ $30.78
-----------
Income From Investment Operations
Net Investment Income(2) .......................................... 0.06
Net Realized and Unrealized Gain on Investment Transactions ....... 4.38
-----------
Total From Investment Operations .................................. 4.44
-----------
Distributions
From Net Realized Gains on Investment Transactions ................ (1.69)
-----------
Net Asset Value, End of Period ...................................... $33.53
===========
Total Return(3) ................................................... 15.28%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ................... 0.80%(4)
Ratio of Net Investment Income to Average Net Assets ................ 0.23%(4)
Portfolio Turnover Rate ............................................. 107%
Average Commission Paid per Investment Security Traded .............. $0.0398
Net Assets, End of Period (in thousands) ............................ $334
- ----------
(1) November 14, 1996 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total return is not annualized.
(4) Annualized.
See Notes to Financial Statements
ANNUAL REPORT FINANCIAL HIGHLIGHTS 27
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
VISTA
For a Share Outstanding Throughout the Years Ended October 31
Investor Class
1997 1996 1995 1994 1993
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ..................... $15.68 $15.73 $10.94 $12.24 $11.01
----------- ---------- ----------- ----------- -----------
Income From Investment Operations
Net Investment Loss ................................. (0.10)(1) (0.11)(1) (0.08)(1) (0.08) (0.07)
Net Realized and Unrealized Gain
on Investment Transactions .......................... 0.13 1.09 4.90 0.45 1.95
----------- ---------- ----------- ----------- -----------
Total From Investment Operations .................... 0.03 0.98 4.82 0.37 1.88
----------- ---------- ----------- ----------- -----------
Distributions
From Net Realized Gains on Investment Transactions .. (1.18) (1.02) (0.03) (1.66) (0.64)
Distributions in Excess of Net Realized Gains ....... -- (0.01) -- (0.01) (0.01)
----------- ---------- ----------- ----------- -----------
Total Distributions ................................. (1.18) (1.03) (0.03) (1.67) (0.65)
----------- ---------- ----------- ----------- -----------
Net Asset Value, End of Year ........................... $14.53 $15.68 $15.73 $10.94 $12.24
=========== ========== =========== =========== ===========
Total Return(2) ..................................... 0.29% 6.96% 44.20% 4.16% 17.71%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ...... 1.00% 0.99% 0.98% 1.00% 1.00%
Ratio of Net Investment Income to Average Net Assets ... (0.73)% (0.70)% (0.60)% (0.80)% (0.60)%
Portfolio Turnover Rate ................................ 96% 91% 89% 111% 133%
Average Commission Paid per
Investment Security Traded ............................. $0.0292 $0.0280 $0.0330 --(3) --(3)
Net Assets, End of Year (in millions) .................. $1,828 $2,276 $1,676 $792 $847
</TABLE>
- ----------
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Disclosure of average commission paid per investment security traded was
not required prior to the year ended October 31, 1995.
See Notes to Financial Statements
28 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
VISTA
For a Share Outstanding Throughout the Year Ended October 31 (except as noted)
Advisor Class
1997 1996(1)
PER-SHARE DATA
<S> <C> <C>
Net Asset Value, Beginning of Period .................................. $15.67 $16.87
----------- ----------
Income From Investment Operations
Net Investment Loss(2) .............................................. (0.14) (0.02)
Net Realized and Unrealized Gain (Loss) on Investment Transactions .. 0.15 (1.18)
----------- ----------
Total From Investment Operations .................................... 0.01 (1.20)
----------- ----------
Distributions
From Net Realized Gains on Investment Transactions .................. (1.18) --
----------- ----------
Net Asset Value, End of Period ........................................ $14.50 $15.67
=========== ==========
Total Return(3) ..................................................... 0.15% (7.11)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ..................... 1.25% 1.25%(4)
Ratio of Net Investment Income to Average Net Assets .................. (0.98)% (1.20)%(4)
Portfolio Turnover Rate ............................................... 96% 91%
Average Commission Paid per Investment Security Traded ................ $0.0292 $0.0280
Net Assets, End of Period (in millions) ............................... $7 $6
</TABLE>
- ----------
(1) October 2, 1996 (commencement of sale) through October 31, 1996.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
ANNUAL REPORT FINANCIAL HIGHLIGHTS 29
FINANCIAL HIGHLIGHTS
VISTA
For a Share Outstanding Throughout the Period Ended as Indicated
Institutional
Class
1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period ..................... $15.73
-----------
Income From Investment Operations
Net Investment Loss(2) ................................. (0.07)
Net Realized and Unrealized Gain
on Investment Transactions ............................. 0.08
-----------
Total From Investment Operations ....................... 0.01
-----------
Distributions
From Net Realized Gains on Investment Transactions ..... (1.18)
-----------
Net Asset Value, End of Period ........................... $14.56
===========
Total Return(3) ........................................ 0.17%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets ........ 0.80%(4)
Ratio of Net Investment Income to Average Net Assets ..... (0.53)%(4)
Portfolio Turnover Rate .................................. 96%
Average Commission Paid per Investment Security Traded ... $0.0292
Net Assets, End of Period (in millions) .................. $14
- ----------
(1) November 14, 1996 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
30 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of American Century-Twentieth Century
Ultra Fund and American Century-Twentieth Century Vista Fund (the "Funds"), two
of the funds comprising American Century Mutual Funds, Inc. (formerly Twentieth
Century Investors, Inc.), as of October 31, 1997, and the related statements of
operations and changes in net assets for the year then ended, and the financial
highlights for the year then ended. These financial statements and the financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits. The financial statements and the financial
highlights of the Funds for each of the periods in the four-year period ended
October 31, 1996 were audited by other auditors whose report, dated November 20,
1996, expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American
Century-Twentieth Century Ultra Fund and American Century-Twentieth Century
Vista Fund as of October 31, 1997, the results of their operations, the changes
in their net assets, and the financial highlights for the year then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 3, 1997
ANNUAL REPORT INDEPENDENT AUDITORS' REPORT 31
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the ensuing
year or until their successors are elected and qualified.
ULTRA VISTA
James E. Stowers, Jr.
For: 333,216,610 83,600,220
Withheld: 14,428,545 1,860,858
James E. Stowers III
For: 333,191,701 83,506,007
Withheld: 14,450,454 1,955,071
Thomas A. Brown
For: 333,577,760 83,686,967
Withheld: 14,064,395 1,774,111
Robert W. Doering, M.D.
For: 331,369,558 83,596,789
Withheld: 16,272,597 1,864,289
D.D. (Del) Hock
For: 333,446,334 83,645,571
Withheld: 14,195,821 1,815,507
Linsley L. Lundgaard
For: 333,199,040 83,581,170
Withheld: 14,443,115 1,879,908
Donald H. Pratt
For: 333,562,568 83,691,966
Withheld: 14,079,587 1,769,112
Lloyd T. Silver, Jr.
For: 333,399,412 83,636,835
Withheld: 14,242,743 1,824,243
M. Jeannine Strandjord
For: 333,537,559 83,676,180
Withheld: 14,104,596 1,784,898
PROPOSAL 2:
To vote on approval of a Management Agreement with American Century
Investment Management, Inc.
ULTRA
INVESTOR ADVISOR INSTITUTIONAL
For: 320,946,954 532,862 3,523
Against: 8,933,649 0 0
Abstain: 9,319,015 0 0
Broker Non-Vote: 8,442,537 -- --
VISTA
INVESTOR ADVISOR INSTITUTIONAL
For: 80,811,561 423,136 925,466
Against: 2,255,944 0 0
Abstain: 494,782 0 0
Broker Non-Vote: 1,898,791 -- --
PROPOSAL 3:
To vote on the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
ULTRA VISTA
For: 333,942,679 83,333,465
Against: 6,003,562 1,699,374
Abstain: 7,695,914 428,239
32 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the following
items.
* Eliminate the fundamental investment limitation concerning diversification of
investments.
ULTRA VISTA
For: 306,258,167 77,382,657
Against: 20,302,465 5,470,985
Abstain: 12,638,986 708,645
Broker Non-Vote: 8,442,537 1,898,791
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
ULTRA VISTA
For: 306,323,938 77,245,225
Against: 20,063,472 5,582,232
Abstain: 12,812,208 734,830
Broker Non-Vote: 8,442,537 1,898,791
* Amend the fundamental investment limitation concerning borrowing.
ULTRA VISTA
For: 304,879,890 77,067,102
Against: 21,561,579 5,762,051
Abstain: 12,758,149 733,134
Broker Non-Vote: 8,442,537 1,898,791
* Amend the fundamental investment limitation concerning lending.
ULTRA VISTA
For: 305,112,085 77,123,180
Against: 21,318,492 5,698,121
Abstain: 12,769,041 740,986
Broker Non-Vote: 8,442,537 1,898,791
* Amend the fundamental investment limitation concerning concentration of
investments in a particular industry.
ULTRA VISTA
For: 305,885,074 77,183,010
Against: 20,694,683 5,643,535
Abstain: 12,619,861 735,742
Broker Non-Vote: 8,442,537 1,898,791
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
ULTRA VISTA
For: 305,730,385 77,245,750
Against: 20,755,603 5,588,288
Abstain: 12,713,630 728,249
Broker Non-Vote: 8,442,537 1,898,791
* Eliminate the fundamental limitation concerning investment in other
investment companies.
ULTRA VISTA
For: 306,692,930 77,357,316
Against: 19,875,071 5,494,207
Abstain: 12,631,617 710,764
Broker Non-Vote: 8,442,537 1,898,791
* Amend the fundamental investment limitation concerning investments in real
estate.
ULTRA VISTA
For: 306,953,271 77,368,211
Against: 19,674,340 5,483,149
Abstain: 12,572,007 710,927
Broker Non-Vote: 8,442,537 1,898,791
ANNUAL REPORT PROXY VOTING RESULTS 33
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning underwriting.
ULTRA VISTA
For: 306,691,497 77,336,572
Against: 19,693,296 5,481,256
Abstain: 12,814,825 744,459
Broker Non-Vote: 8,442,537 1,898,791
* Amend the fundamental investment limitation concerning commodities.
ULTRA VISTA
For: 305,433,295 77,098,208
Against: 21,071,772 5,732,390
Abstain: 12,694,551 731,689
Broker Non-Vote: 8,442,537 1,898,791
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
ULTRA VISTA
For: 306,697,491 77,363,282
Against: 19,835,914 5,487,247
Abstain: 12,666,213 711,758
Broker Non-Vote: 8,442,537 1,898,791
* Eliminate the fundamental limitation concerning short sales.
ULTRA VISTA
For: 305,965,122 77,209,770
Against: 20,781,869 5,631,820
Abstain: 12,452,627 720,697
Broker Non-Vote: 8,442,537 1,898,791
* Eliminate the fundamental investment limitation concerning margin purchases
of securities.
ULTRA VISTA
For: 305,736,551 77,125,010
Against: 21,034,574 5,718,942
Abstain: 12,428,493 718,335
Broker Non-Vote: 8,442,537 1,898,791
34 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
SHARE CLASS AND RETIREMENT ACCOUNT
INFORMATION
SHARE CLASSES
Until September 3, 1996, Ultra and Vista issued one class of fund shares,
reflecting the fact that most investors bought their shares directly from
American Century. All investors paid the same annual unified management fee and
did not pay any commissions or other fees to purchase shares from American
Century.
Now more share purchases are made by investors through financial
intermediaries (who ordinarily are compensated for the additional services they
provide), or by very large institutional investors, who expect lower costs
because of their size. In September 1996, American Century began to offer three
classes of shares for the Ultra and Vista funds. One class is for investors who
still buy directly from American Century, one is for investors who buy through
financial intermediaries, and the third is for large institutional customers.
The original class of Ultra and Vista shares is called the INVESTOR CLASS.
All shares issued and outstanding before September 3, 1996, have been designated
as Investor Class shares. Investor Class shares may also be purchased after
September 3, 1996. Investor Class shareholders do not pay any commissions or
other fees for purchase of fund shares directly from American Century. Investors
who buy Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee. THE PRICE AND PERFORMANCE OF THE INVESTOR CLASS
SHARES ARE LISTED IN NEWSPAPERS. NO OTHER CLASS IS CURRENTLY LISTED.
In addition, there is an ADVISOR CLASS, which is sold through banks,
broker-dealers, insurance companies and financial advisors. Advisor Class shares
are subject to a 0.50% Rule 12b-1 service and distribution fee. Half of that fee
is available to pay for recordkeeping and administrative services, and half is
available to pay for distribution services provided by the financial
intermediary through which the Advisor Class shares are purchased. The total
expense ratio of the Advisor Class shares is 0.25% higher than the total expense
ratio of the Investor Class shares.
There is also an INSTITUTIONAL CLASS, which is available to endowments,
foundations, defined benefit pension plans or financial intermediaries serving
these investors. This class recognizes the relatively lower cost of serving
institutional customers and others who invest at least $5 million in an American
Century fund or at least $10 million in multiple funds. In recognition of the
larger investments and account balances and comparatively lower transaction
costs, the total expense ratio of the Institutional Class shares is 0.20% less
than the total expense ratio of the Investor Class shares.
All classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
ANNUAL REPORT SHARE CLASS AND RETIREMENT ACCOUNT INFORMATION 35
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers 10 equity funds that invest in the stocks
of growing companies, both domestically and internationally. The philosophy
behind these growth funds focuses on three important principles. First, the
funds seek to own successful companies, which we define as those with growing
earnings and revenues. Second, we attempt to keep the funds fully invested,
regardless of short-term market activity. Experience has shown that market gains
can occur in unpredictable spurts and that missing those opportunities can
significantly limit the potential for gain. Third, the funds are managed by
teams, rather than by one "star." We believe this allows us to make better, more
consistent management decisions.
In addition to these principles, each fund has its own investment policies:
TWENTIETH CENTURY ULTRA generally invests in the securities of mid-sized and
larger companies that exhibit growth. It will typically have significant price
fluctuations.
TWENTIETH CENTURY VISTA invests mainly in the securities of smaller and
medium-sized firms that exhibit growth. The fund is subject to significant price
volatility but offers high long-term growth potential.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500 publicly
traded U.S. companies that are considered to be leading firms in dominant
industries. Created by Standard & Poor's Corporation, it is considered to be a
broad measure of U.S. stock market performance.
The S&P MIDCAP 400 is a capitalization-weighted index of the stocks of the
400 largest leading U.S. companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
The RUSSELL 2000 INDEX was created by the Frank Russell Company. It measures
the performance of the 2,000 smallest of the 3,000 largest publicly-traded U.S.
companies based on total market capitalization. The Russell 2000 represents
approximately 10% of the total market capitalization of the top 3,000 companies.
The average market capitalization of the index is approximately $420 million.
The RUSSELL 2500 INDEX was created by the Frank Russell Company. It measures
the performance of the 2,500 smallest of the 3,000 largest publicly-traded U.S.
companies based on total market capitalization. The Russell 2500 represents
approximately 23% of the total market capitalization of the top 3,000 companies.
The average market capitalization of the index is approximately $650 million.
The RUSSELL 2500 GROWTH INDEX measures the performance of those Russell 2500
companies with higher price-to-book ratios and higher forecasted growth rates.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
ULTRA:
Portfolio Managers Jim Stowers III
Bruce Wimberly
VISTA:
Portfolio Managers Glenn Fogle
Arnold Douville
- --------------------------------------------------------------------------------
36 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on pages 25-30.
PORTFOLIO STATISTICS
* NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
* PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
* PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
* EXPENSE RATIO-- the operating expenses of the fund, expressed as a percentage
of average net assets. Share-holders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF STOCKS
* BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
* CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
* GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staple companies.
* LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
* MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P 400.
* SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
* VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
STATISTICAL TERMINOLOGY
* PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
ANNUAL REPORT GLOSSARY 37
[american century logo}
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
9712 [recycled logo]
SH-BKT-10467 Recycled
<PAGE>
ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
TWENTIETH
CENTURY
GROUP
Giftrust
TABLE OF CONTENTS
Report Highlights ......................................................... 1
Our Message to You ........................................................ 2
Market Perspective ........................................................ 3
Performance & Portfolio Information ....................................... 4
Management Q & A .......................................................... 5
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statements of Changes in Net Assets ....................................... 12
Notes to Financial Statements ............................................. 13
Financial Highlights ...................................................... 15
Independent Auditors' Report .............................................. 16
Proxy Voting Results ...................................................... 17
Background Information
Investment Philosophy and Policies ............................. 20
Comparative Indices ............................................ 20
Investment Team Leaders ........................................ 20
Glossary .................................................................. 21
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
Giftrust
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* Returns in the U.S. stock market were strong across capitalization ranges,
with the stocks of large- and medium-sized companies posting the best gains
and small-cap stocks not far behind.
* The S&P 500's total return for the year ended October 31, 1997, was 32.10%,
compared to 32.67% for the S&P MidCap 400 and 29.33% for the Russell 2000.
* The strong gains were attributable to the continuing U.S. economic expansion,
which is the third longest since World War II. Although the market indices had
a strong showing, the ride was not smooth.
* Gains for small- and mid-cap stocks surpassed large-cap returns in August,
following earnings disappointments by several multinational consumer
companies.
* Stocks of all sizes faltered in October, as the market reacted to turmoil in
southeast Asian markets.
GIFTRUST
* For the year ended October 31, 1997, Giftrust's total return was 1.95%. During
the last six months of the period, the fund rebounded sharply, posting an
impressive 34.78% return.
GIFTRUST
TOTAL RETURNS: AS OF 10/31/97
6 Months 34.78%*
1 Year 1.95%
NET ASSETS: $1 billion
(AS OF 10/31/97)
INCEPTION DATE: 11/25/83
TICKER SYMBOL: TWGTX
(*)Not annualized.
* A strong rally in small- and mid-cap growth stocks helped the fund outperform
its benchmark during the second half. However, that performance was offset by
the fund's losses in the prior six-month period.
* The fund's long-term performance remains excellent, with an average annual
return over 10 years of 22.43%.
* During fiscal 1997, we established a large weighting in selected energy stocks
due to the rapid growth in earnings in sectors of that industry. These stocks
were the strongest contributors during the second half of the year.
* Specialty software companies that hurt the fund early in the year rebounded
dramatically after an April correction in technology stocks.
* The fund's holdings in high-tech contract manufacturers increased during the
final six months. Firms such as Jabil Circuit, Inc. are benefiting from
decisions by computer and telecommunications companies to outsource circuit
board manufacturing and systems assembly to specialist companies.
* Finally, positions in software companies were trimmed to retain those holdings
with the strongest earnings acceleration.
Many of the investment terms in this report are defined in the Glossary on page
21.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers, Jr. and James E. Stowers III]
The stock market's bull run continued in 1997, although there were a few
stumbles. In August, several widely-held companies announced earnings
disappointments and, in October, currency devaluations in southeast Asia rumbled
through markets worldwide. The U.S. market rebounded after each period of
turbulence, as the underlying strength of the economy supported a continued
advance in stock prices. Despite fallout from Asian markets, there are many
reasons to believe strong stock performance will continue. Fundamental
indicators of the U.S. economy's health remain solid, providing an environment
for companies to build earnings while surrendering only a small percentage of
their gains to inflation.
Not all investors participated equally in the market's performance. Our
funds that invest in the stocks of small and mid-sized companies had a
disappointing fiscal year. We have increased our focus on these funds to provide
additional staffing and other resources the team needs to achieve improved
returns. We are not satisfied with results of the past year and are committed to
doing better.
In 1998, American Century will enter its 40th year, a landmark few mutual
fund companies can claim. During the 1990s, we have broadened our range of
investment choices dramatically. Today, American Century offers nearly 70 funds,
enabling us to meet a wide array of investor objectives.
The company's tradition of creating new opportunities for investors
continued in July, when we announced that J.P. Morgan had agreed to become a
significant minority shareholder in American Century. For more than 150 years,
J.P. Morgan has served institutions, governments and individuals with complex
financial needs. Within the framework of this proposed relationship, American
Century will continue to operate as an independent company. Our corporate
management team will remain the same, and the Stowers family will retain voting
control of the company. This proposed business partnership will allow us to
expand and enhance the investment services we provide investors.
These are interesting times to be in the mutual fund industry, whether as an
investor or a CEO. Some analysts see inflation on the horizon. Others see
deflation, as global competition forces prices downward. Meanwhile, investors
enjoy new choices when investing for retirement, including the expanded
opportunities provided by the Taxpayer Relief Act of 1997. Whatever your needs
or outlook, we hope you will give us an opportunity to help you reach your
financial goals.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
THE YEAR IN REVIEW
On October 31, 1997, the U.S. economic expansion completed its eightieth
month, making it the third longest since World War II. A 106-month-long period
of sustained economic growth in the 1960s is the record holder, followed by a
92-month spell in the 1980s. What differentiates the recent expansion from
earlier ones is low inflation, with an average annual rate of just over 2%
during the decade and just 1.8% for the 10 months of 1997. Wage pressure, a key
component of inflation, has yet to materialize despite the lowest unemployment
rates since the early 1970s. U.S. corporations have used restructurings and
technological advances to increase productivity more rapidly than the demand for
labor. In the absence of inflationary pressure, interest rates have been low,
reducing corporate borrowing costs. As a result, profit margins are at their
highest levels since 1969 and the economy has benefited greatly. It grew at a
torrid annual pace of 4.9% in the first quarter of 1997, the strongest quarter
in more than nine years. Growth in the second and third quarters remained
strong, at annual rates of 3.3% each quarter.
THE MARKETS
The stock market reflected this period of economic growth, with all sectors
showing robust returns. The chart above captures the market's climb during the
year ended October 31, 1997. Although the indices had a strong showing, the ride
was not smooth, with unusually high levels of volatility and volumes of shares
traded setting records in August and October. Whereas the S&P 500 was far ahead
of the other indices at April 30, 1997, the gap had closed six months later.
[line graph - data below]
U.S. Stock Market Performance
Growth of $1.00 for the year ended October 31, 1997
S&P 500 S&P 400 Russell 2000
10/31/96 $1.00 $1.00 $1.00
11/30/96 $1.07 $1.06 $1.04
12/31/96 $1.06 $1.06 $1.07
1/31/97 $1.12 $1.10 $1.09
2/28/97 $1.13 $1.09 $1.06
3/31/97 $1.08 $1.04 $1.01
4/30/97 $1.15 $1.07 $1.02
5/31/97 $1.21 $1.16 $1.13
6/30/97 $1.27 $1.20 $1.18
7/31/97 $1.37 $1.31 $1.23
8/31/97 $1.29 $1.31 $1.26
9/30/97 $1.37 $1.39 $1.35
10/31/97 $1.32 $1.33 $1.29
Comparative One-Year Returns for the year ended October 31, 1997
S&P 500 32.10%
S&P MidCap 400 32.67%
Russell 2000 29.33%
SOURCE: LIPPER ANALYTICAL SERVICES, INC.
A handful of large, multinational stocks continued their two-year dominance
of the market until August, when Coca-Cola and Gillette announced earnings
disappointments. Other large companies followed with similar announcements,
leading to an abrupt halt in the market's relentless upward march and the
outperformance of large stocks. The S&P 500 Index was down 5.8% for the month of
August.
Stock prices resumed their upward move in September; however, the gains of
small- and mid-cap stocks exceeded those of large caps. October saw another
reversal as the market reacted to news of currency devaluations across southeast
Asia. Those devaluations sent market indices plummeting in such emerging markets
as Thailand, Malaysia and Singapore. U.S. investors started paying attention
when the panic selling reached Hong Kong and European markets. The S&P 500
dropped 3.45% in October, the S&P MidCap 400 dropped 4.35% and the Russell 2000
fell 4.39% amid fears that the sell-off overseas would translate into reduced
corporate profits for U.S. multinational companies in 1998.
The relative outperformance of medium- and small-cap stocks later in the
year resulted from several factors. These companies' profits are not as
dependent on foreign trade as the profits of larger companies; small companies
were not tainted by the earnings disappointments that hurt the large-cap sector
over the summer; and small-cap prices had reached very attractive levels
relative to earnings, positioning them for a strong rebound.
ANNUAL REPORT MARKET PERSPECTIVE 3
<TABLE>
<CAPTION>
PERFORMANCE & PORTFOLIO INFORMATION
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS LIFE OF FUND(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Giftrust 34.78% 1.95% 14.02% 22.35% 22.43% 19.76%
Russell 2000 Growth 30.70% 21.08% 18.28% 15.92% 14.10% 9.62%(3)
</TABLE>
- ----------
(1) Returns for periods less than one year are not annualized.
(2) Inception was November 25, 1983.
(3) Return since 11/30/83, the date nearest the fund's inception for which data
are available.
See pages 20 and 21 for more information about the Russell 2000 Growth Index and
returns.
[mountian graph - data below]
GROWTH OF $10,000 OVER 10 YEARS
VALUE ON 10/31/97: $75,736 GIFTRUST
$37,395 RUSSELL 2000 GROWTH
GIFTRUST RUSSELL 2000 GROWTH
DATE ACCT VALUE ACCT VALUE
10/31/87 $10,000 $10,000
10/31/88 $11,629 $12,312
10/31/89 $17,422 $14,617
10/31/90 $13,975 $10,767
10/31/91 $25,024 $17,930
10/31/92 $27,608 $17,866
10/31/93 $43,027 $22,809
10/31/94 $51,095 $22,601
10/31/95 $67,709 $27,254
10/31/96 $74,290 $30,886
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing Giftrust's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the total
return line of the Russell 2000 Growth Index does not. 10/31/97 $75,736 $37,395.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Companies 67 70
Median Price/Earnings Ratio 31.8 47.8
Portfolio Turnover 118% 121%
Expense Ratio 1.00% 0.98%
4 PERFORMANCE & PORTFOLIO INFORMATION AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q & A
An interview with Glenn Fogle and John Seitzer, portfolio managers on the
Giftrust investment team.
How did the fund perform?
For the year ended October 31, 1997, Giftrust's total return was a
disappointing 1.95%. The fund's benchmark, the Russell 2000 Growth Index,
returned 21.08% for the year. The fund had an impressive 34.78% return during
the final six months of the period, compared to a 30.70% return for its
benchmark. In the second half of our fiscal year, small- and
medium-capitalization stocks enjoyed a strong rebound as investors' faith in
large-cap stocks faltered. However, the fund's excellent performance in the
second half was offset by its losses in the first six months.
Despite the volatility of 1997, the fund maintains an excellent long-term
record, with an average annual return of 22.43% over the past decade.
Price volatility is a fact of life among smaller stocks. Still, this year
was exceptional. In the first half of the period, large-cap stocks outperformed
the stocks of smaller companies by a wide margin. In addition, performance was
restricted to a fairly small group of stocks in each capitalization category. In
the second half, the stocks of smaller companies rebounded sharply. The fund
outperformed its benchmark as investors regained confidence in the high growth
companies in which Giftrust invests.
What attracted investors to mid- and small-cap growth stocks?
Two things seemed responsible. Several high profile, large-cap companies,
including Coca-Cola and Gillette, announced disappointing earnings for the
second quarter. This gave investors a heads-up that even large, global consumer
franchises can stumble. Secondly, investors started to gain confidence in the
earnings prospects of the high growth companies we buy. The fourth quarter of
1996 and the first of 1997 were frustrating for us because, although many of our
holdings met very high earnings expectations, investors doubted that such growth
could continue. As these companies continued to hit earnings targets, investors
became more willing to pay the premium that high growth companies ordinarily
command, especially since the premium had fallen over the past year.
[bar chart - data below]
GIFTRUST'S ONE-YEAR RETURNS OVER TEN YEARS (Periods ended October 31)
GIFTRUST RUSSELL 2000 GROWTH
DATE RETURN RETURN
10/31/88 16.28% 23.12%
10/31/89 49.81% 18.72%
10/31/90 -19.77% -26.34%
10/31/91 79.04% 66.53%
10/31/92 10.32% -0.36%
10/31/93 55.84% 27.67%
10/31/94 18.75% -0.91%
10/31/95 32.52% 20.59%
10/31/96 9.72% 13.33%
10/31/97 1.95% 21.08%
This chart illustrates the fund's returns over the past 10 years and compares
them with the Russell 2000 Growth's returns. Giftrust's total returns include
operating expenses, while the Russell 2000 Growth's returns do not. See page 20
for a description of the index.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
ANNUAL REPORT MANAGEMENT Q & A 5
MANAGEMENT Q & A
How did you respond to the market's 7.18% drop on October 27?
We checked on each of our holdings to see if there were any reason to doubt
our confidence in their business prospects, and we added to holdings that had
dropped to very attractive prices. We saw no reason to join a market move driven
by psychological fears rather than economic factors.
What stocks or sectors added most to returns during the final six months of the
year?
The fund held a large weighting in energy service stocks due to the growth
in earnings we saw coming in that sector. These stocks, many of which were
purchased during the first half of the fiscal year, were the strongest
contributors during the second half. New technology is enabling oil and gas
companies to more accurately find, and more efficiently extract, oil and gas
reserves. Our holdings included firms that supply energy companies with both
land rigs and offshore rigs, as well as boats to service offshore operations.
The number of drilling rigs is down by half compared to 10 years ago and the
cost and time to build new equipment is significant, giving tremendous pricing
power to rig service companies.
Among our other top performers were specialty software companies, including
HBO & Company and CBT Group Plc. HBO provides software to help hospitals manage
back-office administrative functions, track clinical data and manage patient
information flow. CBT develops computer-based training programs for technology
workers. Both companies rebounded from market disfavor in the first half.
Two other sectors that contributed greatly to performance -- computer
software and electronic components -- were also sectors where many of the fund's
holdings were concentrated. Even though investment decisions are made on a
stock-by-stock basis, significant weightings often develop in sectors that are
experiencing faster growth than the economy at large.
What stocks or sectors detracted from fund performance?
The fund's biggest disappointment came from Spectrian Corp., which makes
amplifiers for wireless service providers. These amplifiers improve the
transmission of cellular calls. The company's stock fell after its largest
customer, Northern Telecom, forecast slower orders. The slide was compounded by
the market's skittishness in October. PairGain Technologies was also
disappointing. The company sells products that increase the speed and
information-carrying capacity of copper phone wires. The stock declined in the
face of a price war initiated by competitors who are frustrated by PairGain's
dominance of the market.
TOP TEN HOLDINGS % of fund investments
As of As of
10/31/97 4/30/97
Trico Marine Services, Inc. 3.2% 1.8%
CBT Group Plc ADR 3.1% 2.5%
Jabil Circuit, Inc. 2.6% 2.5%
P-COM, Inc. 2.5% 2.5%
Applied Graphics Technologies, Inc. 2.4% -
Vitesse Semiconductor Corp. 2.2% 2.3%
Family Dollar Stores, Inc. 2.2% 1.0%
Agouron Pharmaceuticals, Inc. 2.2% 2.0%
Tekelec 2.1% -
Clear Channel Communications, Inc. 2.1% -
TOP FIVE INDUSTRIES % of fund investments
As of As of
10/31/97 4/30/97
Electrical & Electronic
Components 13.9% 8.6%
Energy (Services) 13.8% 6.9%
Computer Software & Services 10.8% 14.3%
Communications Equipment 9.2% 6.9%
Biotechnology 8.7% 6.5%
6 Management Q & A American Century Investments
MANAGEMENT Q & A
What changes did you make in the fund's investment strategy or holdings?
As the chart on page 6 shows, we doubled our holdings in energy services. In
addition, we continued to add to high-tech contract manufacturers, which are
included in the electrical and electronic components category. Firms such as
Jabil Circuit, Inc. are benefiting from decisions by computer and
telecommunications companies to outsource circuit board manufacturing and
systems assembly to specialist companies.
The fund's biotechnology holdings were up, partly due to these stocks'
appreciation and partly due to new investments. Agouron Pharmaceuticals, Inc. is
an example of a company whose stock we continued to buy this year. The company
makes an AIDS-fighting drug called Viracept, whose sales have exceeded
forecasts. The company's stock gained 42.6% during the period.
On the sell side, we trimmed the fund's holdings in software companies,
retaining those companies with the strongest earnings acceleration.
Do you see the shift toward small- and mid-cap stocks continuing?
The market is not yet in love with small- and mid-cap growth stocks, but it
no longer hates them. In other words, from October, 1996, through March, 1997,
investors seemed bent on reducing their exposure to smaller stocks. The selling
pressure caused these stocks to badly trail large-cap indices. More recently,
the market's narrow preference for large-cap stocks has broadened to include the
rest of the market, which is an improvement but hardly a major shift in
sentiment. However, if the large-cap stocks that have led the market for three
years continue to see slowing earnings growth rates, we would expect investors
to become more interested in smaller stocks with more robust earnings growth.
ANNUAL REPORT MANAGEMENT Q & A 7
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- ------------------------------------------------------------------------------
COMMON STOCKS
AEROSPACE & DEFENSE--3.0%
498,900 DONCASTERS plc ADR(1)(2) $ 13,439
700,000 Wyman-Gordon Co.(1) 16,800
---------------
30,239
---------------
BIOTECHNOLOGY--8.7%
485,000 Agouron Pharmaceuticals, Inc.(1) 22,097
400,000 BioChem Pharma Inc.(1) 10,025
350,000 Centocor, Inc.(1) 15,378
250,000 Incyte Pharmaceuticals, Inc.(1) 19,813
440,000 PAREXEL International Corp.(1)(2) 15,840
190,000 Sangstat Medical Corp.(1) 5,854
-------------
89,007
-------------
BROADCASTING & MEDIA--4.7%
330,000 Clear Channel Communications, Inc.(1) 21,780
200,000 Heftel Broadcasting Corp.(1) 13,175
310,000 Jacor Communications, Inc.(1) 12,943
------------
47,898
------------
BUSINESS SERVICES & SUPPLIES--2.6%
450,000 Applied Graphics Technologies, Inc.(1) 24,075
75,000 Billing Information Concepts Corp.(1) 2,916
-----------
26,991
------------
COMMUNICATIONS EQUIPMENT--9.2%
597,000 Boston Technology, Inc.(1) 16,194
1,300,000 P-COM, Inc.(1) 26,000
350,000 Powerwave Technologies, Inc.(1) 10,806
525,000 Tekelec(1) 21,951
612,000 Teledata Communications(1)(2) 18,857
------------
93,808
------------
COMPUTER SOFTWARE & SERVICES--10.8%
405,000 CBT Group Plc ADR(1) 31,185
480,000 HBO & Co. 20,850
410,000 JDA Software Group, Inc.(1) 12,787
160,000 Lernout & Hauspie Speech
Products N.V.(1) 7,800
210,000 McAfee Associates, Inc.(1) 10,434
165,000 Saville Systems Ireland plc ADR(1) 9,797
425,000 Veritas Software Corp.(1) 17,691
------------
110,544
------------
CONTROL & MEASUREMENT--0.9%
215,000 Orbotech Ltd.(1) $ 9,272
------------
ELECTRICAL & ELECTRONIC
COMPONENTS--13.9%
502,500 ANADIGICS, Inc.(1) 18,561
300,000 Burr-Brown Corp.(1) 9,019
830,000 DII Group, Inc.(1) 20,439
580,000 Jabil Circuit, Inc.(1) 26,209
193,300 Micrel, Inc.(1) 6,934
343,700 Sawtek Inc.(1) 11,600
410,000 Unitrode Corp.(1) 10,993
520,000 Vitesse Semiconductor Corp.(1) 22,588
450,000 Zytec Corp.(1) 16,059
------------
142,402
------------
ENERGY (SERVICES)--13.8%
185,000 BJ Services Co.(1) 15,679
180,000 Diamond Offshore Drilling, Inc. 11,205
510,000 Global Marine Inc.(1) 15,874
370,000 Hvide Marine, Inc.(1) 12,187
570,000 Key Energy Group, Inc.(1) 17,884
302,900 Marine Drilling Companies, Inc.(1) 8,963
300,000 Noble Drilling Corp.(1) 10,669
890,000 Trico Marine Services, Inc.(1)(2) 32,819
350,000 UTI Energy Corp.(1) 15,619
------------
140,899
------------
ENVIRONMENTAL SERVICES--3.1%
760,000 Allied Waste Industries, Inc.(1) 15,438
430,000 USA Waste Services, Inc.(1) 15,910
------------
31,348
------------
FOOD & BEVERAGE--2.1%
440,000 Morningstar Group Inc.(1) 18,783
150,000 Northland Cranberries, Inc. 2,325
------------
21,108
------------
FURNITURE & FURNISHINGS--0.5%
100,000 Miller (Herman), Inc. 4,900
------------
HEALTHCARE--3.0%
460,000 Concentra Managed Care, Inc.(1) 14,979
225,000 Pediatrix Medical Group Inc.(1) 9,506
242,700 Quorum Health Group, Inc.(1) 5,878
------------
30,363
------------
See Notes to Financial Statements
8 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- ------------------------------------------------------------------------------
LEISURE--1.5%
150,000 Imax Corporation(1) $ 3,797
435,000 Signature Resorts(1) 11,310
------------
15,107
------------
MACHINERY & EQUIPMENT--3.1%
225,000 SpeedFam International, Inc.(1) 8,339
400,000 U.S. Rentals, Inc.(1) 9,750
350,000 Veeco Instruments Inc.(1) 13,869
------------
31,958
------------
MEDICAL EQUIPMENT & SUPPLIES--2.5%
215,000 Safeskin Corp.(1) 9,742
510,000 Spine-Tech, Inc.(1)(2) 15,842
------------
25,584
------------
PHARMACEUTICALS--2.0%
505,000 Kos Pharmaceuticals, Inc.(1) 18,022
90,000 Omnicare, Inc. 2,503
------------
20,525
------------
PRINTING & PUBLISHING--1.5%
290,000 Consolidated Graphics, Inc.(1) 15,043
------------
RESTAURANTS--3.4%
900,000 Foodmaker, Inc.(1) 14,793
600,000 Rainforest Cafe, Inc.(1) 20,438
------------
35,231
------------
RETAIL (APPAREL)--1.0%
415,000 Dress Barn, Inc.(1) 10,427
------------
RETAIL (GENERAL MERCHANDISE)--2.2%
955,000 Family Dollar Stores, Inc. 22,442
------------
RETAIL (SPECIALTY)--1.5%
600,000 Action Performance Cos. Inc.(1) 15,300
------------
TOTAL COMMON STOCKS--95.0% 970,396
------------
(Cost $768,868)
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS
$200 par value FHLB Discount Notes,
5.50%, 11/3/97(3) $ 200
Repurchase Agreement, Merrill Lynch & Co.,
Inc., (U.S. Treasury obligations), in
a joint trading account at 5.60%, dated
10/31/97, due 11/3/97 (Delivery value $50,424) 50,400
---------------------
TOTAL TEMPORARY CASH INVESTMENTS--5.0% 50,600
---------------------
(Cost $50,600)
TOTAL INVESTMENT SECURITIES--100.0% $1,020,996
=====================
(Cost $819,468)
NOTES TO SCHEDULE OF INVESTMENTS
ADR = American Depositary Receipt
FHLB = Federal Home Loan Bank
(1) Non-income producing.
(2) Affiliated Company: represents ownership of at least 5% of the voting
securities of the issuer and is, therefore, an affiliate as defined in the
Investment Company Act of 1940. (See Note 4 in Notes to Financial Statements
for a summary of transactions for each issuer which is or was an affiliate
at or during the year ended October 31, 1997.)
(3) Rate disclosed is the yield to maturity at purchase.
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 9
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
ASSETS ($ and Shares in Thousands, Except Per-Share Amounts)
Investment securities, at value
(identified cost of $819,468) (Note 3 and Note 4) ............. $1,020,996
Cash .......................................................... 723
Receivable for investments sold ............................... 30,205
Dividends and interest receivable ............................. 39
----------
1,051,963
----------
LIABILITIES
Disbursements in excess of demand deposit cash ................ 50
Payable for investments purchased ............................. 27,235
Payable for capital shares redeemed ........................... 96
Accrued management fees (Note 2) .............................. 942
----------
28,323
----------
Net Assets .................................................... $1,023,640
==========
CAPITAL SHARES, $0.01 PAR VALUE
Authorized .................................................... 200,000
==========
Outstanding ................................................... 40,206
==========
Net Asset Value Per Share ..................................... $ 25.46
==========
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ....................... $ 793,111
Accumulated undistributed net
realized gain on investment transactions ...................... 29,001
Net unrealized appreciation on investments (Note 3) ........... 201,528
----------
$1,023,640
==========
See Notes to Financial Statements
10 STATEMENT OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
INVESTMENT INCOME ($ in Thousands)
Income:
Interest ....................................................... $ 1,954
Dividends ...................................................... 417
--------
2,371
--------
Expenses (Note 2):
Management fees ................................................ 9,053
Directors' fees and expenses ................................... 8
--------
9,061
--------
Net investment loss ............................................ (6,690)
--------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 3)
Net realized gain on investments ............................... 30,092
Change in net unrealized appreciation on investments ........... 4,921
--------
Net realized and unrealized gain
on investments ................................................. 35,013
--------
Net Increase in Net Assets
Resulting from Operations ...................................... $ 28,323
========
See Notes to Financial Statements
ANNUAL REPORT STATEMENT OF OPERATIONS 11
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED OCTOBER 31, 1997 AND OCTOBER 31, 1996
Increase in Net Assets 1997 1996
OPERATIONS ($ and Shares in Thousands)
Net investment loss ........................ $ (6,690) $ (5,739)
Net realized gain on investments ........... 30,092 25,992
Change in net unrealized
appreciation on investments ............... 4,921 51,469
----------- -----------
Net increase in net assets
resulting from operations ................. 28,323 71,722
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gains on
investment transactions ................... (27,032) (48,106)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................. 144,894 242,811
Proceeds from reinvestment of
distributions ............................. 27,026 48,106
Payments for shares redeemed ............... (15,321) (9,895)
----------- -----------
Net increase in net assets
from capital share transactions ............ 156,599 281,022
----------- -----------
Net increase in net assets ................. 157,890 304,638
NET ASSETS
Beginning of year .......................... 865,750 561,112
----------- -----------
End of year ................................ $ 1,023,640 $ 865,750
----------- -----------
TRANSACTIONS IN SHARES OF THE FUND
Sold ....................................... 6,139 10,014
Issued in reinvestment of
distributions ............................. 1,126 2,075
Redeemed ................................... (631) (413)
----------- -----------
Net increase ............................... 6,634 11,676
=========== ===========
See Notes to Financial Statements
12 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Twentieth Century Giftrust
(the Fund) is one of the thirteen series of funds issued by the Corporation. The
Fund's investment objective is to seek capital growth by investing primarily in
common stocks. The following significant accounting policies related to the Fund
are in accordance with accounting policies generally accepted in the investment
company industry.
SECURITY VALUATIONS--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded or a principal securities exchange are valued through valuations obtained
from a commercial pricing service or at the mean of the most recent bid and
asked prices. When valuations are not readily available, securities are valued
at fair value as determined in accordance with procedures adopted by the Board
of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of discounts and accretion of premiums.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
Fund to obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the value of the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
Fund under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
ADDITIONAL INFORMATION--Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc., and the Corporation's transfer agent, American Century Services
Corporation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 13
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified fee. The Agreement provides that all expenses of the Fund,
except brokerage commissions, taxes, interest, expenses of those directors who
are not considered "interested persons" as defined in the Investment Company Act
of 1940 (including counsel fees) and extraordinary expenses, will be paid by
ACIM. The fee is computed daily and paid monthly based on the Fund's average
daily closing net assets during the previous month. The annual management fee
for the Fund is 1.00%.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases and sales of common stock for the year ended October 31, 1997,
were $1,148,789,791 and $1,019,815,019, respectively. As of October 31, 1997,
accumulated net unrealized appreciation on investments was $199,833,539, based
on the aggregate cost of investments of $821,162,336 for federal income tax
purposes, which consisted of unrealized appreciation of $225,033,201 and
unrealized depreciation of $25,199,662.
- --------------------------------------------------------------------------------
4. AFFILIATED COMPANY TRANSACTIONS
A summary of transactions for each issuer which is or was an affiliate at or
during the year ended October 31, 1997, follows:
<TABLE>
October 31, 1997
Share Realized
Balance Purchase Sales Gain Share Market
10/31/1996 Cost Cost (Loss) Balance Value
ISSUER(1) ($ in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ACT Networks, Inc. - $ 11,990 $11,990 $ (6,184) - -
Advanced Digital Information Corp. - 7,599 7,599 1,123 - -
DONCASTERS plc ADR - 9,545 22 11 498,900 $ 13,439
HCIA 100,000 17,499 19,210 (10,224) - -
NBTY, Inc. 875,000 4,314 17,002 5,907 - -
PAREXEL International Corp. 310,000 4,472 9,120 3,962 440,000(2) 15,840
RadiSys Corp. 541,000 - 23,889 (5,423) - -
Spine-Tech, Inc. 190,000 17,908 5,574 (1,111) 510,000 15,842
Teledata Communications - 13,412 - - 612,000 18,857
Trico Marine Services, Inc. - 20,422 - - 890,000(2) 32,819
--------- --------- --------- --------
$107,161 $94,406 $(11,939) $96,797
========= ========= ========= ========
</TABLE>
- ----------
(1) None of the securities produced income during the period.
(2) Includes adjustments for shares received from stock split and/or stock
spinoff during the period.
14 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
GIFTRUST
For a Share Outstanding Throughout the Years Ended October 31 (except as noted)
1997 1996 1995 1994 1993
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year ................ $ 25.79 $ 25.63 $ 20.50 $ 19.23 $ 13.57
----------- --------- --------- ------- -------
Income From Investment Operations
Net Investment Loss ............ (0.18)(1) (0.20)(1) (0.16)(1) (0.10) (0.09)
Net Realized and Unrealized Gain
on Investment Transactions ..... 0.63 2.46 6.37 3.28 7.18
----------- --------- --------- ------- -------
Total From
Investment Operations .......... 0.45 2.26 6.21 3.18 7.09
----------- --------- --------- ------- -------
Distributions
From Net Realized Gains on
Investment Transactions ........ (0.78) (2.10) (1.08) (1.91) (1.42)
In Excess of
Net Realized Gains ............. -- -- -- -- (0.01)
----------- --------- --------- ------- -------
Total Distributions ............ (0.78) (2.10) (1.08) (1.91) (1.43)
----------- --------- --------- ------- -------
Net Asset Value, End of Year ..... $ 25.46 $ 25.79 $ 25.63 $ 20.50 $ 19.23
=========== ========= ========= ======= =======
Total Return(2) ................ 1.95% 9.72% 32.52% 18.75% 55.84%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............ 1.00% 0.98% 0.98% 1.00% 1.00%
Ratio of Net Investment Loss
to Average Net Assets ............ (0.74)% (0.80)% (0.70)% (0.70)% (0.70)%
Portfolio Turnover Rate .......... 118% 121% 105% 115% 143%
Average Commission Paid per Share
of Equity Security Traded ........ $ 0.0278 $ 0.0230 $ 0.0260 --(3) --(3)
Net Assets, End
of Year (in millions) ............ $ 1,024 $ 866 $ 561 $ 266 $ 154
</TABLE>
- ----------
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Disclosure of average commission paid per share of equity security traded
was not required prior to the year ended October 31, 1995.
See Notes to Financial Statements
ANNUAL REPORT FINANCIAL HIGHLIGHTS 15
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century - Twentieth Century
Giftrust Fund (the "Fund"), one of the funds comprising American Century Mutual
Funds, Inc. (formerly Twentieth Century Investors, Inc.), as of October 31,
1997, and the related statements of operations and changes in net assets for the
year then ended, and the financial highlights for the year then ended. These
financial statements and the financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit. The
financial statements and the financial highlights of the Fund for each of the
years in the four-year period ended October 31, 1996 were audited by other
auditors whose report, dated November 20, 1996, expressed an unqualified opinion
on those statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century
Twentieth Century Giftrust Fund as of October 31, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 26, 1997
16 INDEPENDENT AUDITORS' REPORT AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the ensuing
year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 36,589,339
Withheld: 1,961,371
James E. Stowers III
For: 36,594,419
Withheld: 1,956,291
Thomas A. Brown
For: 36,669,506
Withheld: 1,881,204
Robert W. Doering, M.D.
For: 36,599,675
Withheld: 1,951,035
D.D. (Del) Hock
For: 36,645,913
Withheld: 1,904,797
Linsley L. Lundgaard
For: 36,601,692
Withheld: 1,949,018
Donald H. Pratt
For: 36,669,601
Withheld: 1,881,109
Lloyd T. Silver, Jr.
For: 36,633,839
Withheld: 1,916,871
M. Jeannine Strandjord
For: 36,661,633
Withheld: 1,889,077
PROPOSAL 2:
To vote on approval of a Management Agreement with American Century Investment
Management, Inc.
For: 34,829,310
Against: 3,213,768
Abstain: 505,086
Broker Non-Vote: 2,546
PROPOSAL 3:
To vote on the selection by the Board of Directors of Deloitte & Touche LLP as
independent auditors for the Corporation.
For: 35,481,671
Against: 2,596,761
Abstain: 472,278
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the following
items:
* Eliminate the fundamental investment limitation concerning diversification of
investments.
For: 33,286,998
Against: 4,487,111
Abstain: 774,055
Broker Non-Vote: 2,546
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
For: 33,279,836
Against: 4,494,273
Abstain: 774,055
Broker Non-Vote: 2,546
* Amend the fundamental investment limitation concerning borrowing.
For: 33,136,804
Against: 4,637,305
Abstain: 774,055
Broker Non-Vote: 2,546
ANNUAL REPORT PROXY VOTING RESULTS 17
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning lending.
For: 33,151,141
Against: 4,622,968
Abstain: 774,055
Broker Non-Vote: 2,546
* Amend the fundamental investment limitation concerning concentration of
investments in a particular industry.
For: 33,238,669
Against: 4,535,440
Abstain: 774,055
Broker Non-Vote: 2,546
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 33,252,358
Against: 4,521,751
Abstain: 774,055
Broker Non-Vote: 2,546
* Eliminate the fundamental limitation concerning investment in other investment
companies.
For: 33,282,721
Against: 4,491,573
Abstain: 773,870
Broker Non-Vote: 2,546
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 33,309,664
Against: 4,464,630
Abstain: 773,870
Broker Non-Vote: 2,546
* Amend the fundamental investment limitation concerning underwriting.
For: 33,305,151
Against: 4,468,958
Abstain: 774,055
Broker Non-Vote: 2,546
* Amend the fundamental investment limitation concerning commodities.
For: 33,241,424
Against: 4,532,870
Abstain: 773,870
Broker Non-Vote: 2,546
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 33,331,005
Against: 4,442,590
Abstain: 774,569
Broker Non-Vote: 2,546
* Eliminate the fundamental limitation concerning short sales.
For: 33,249,188
Against: 4,524,407
Abstain: 774,569
Broker Non-Vote: 2,546
* Eliminate the fundamental investment limitation concerning margin purchases of
securities.
For: 33,245,196
Against: 4,528,399
Abstain: 774,569
Broker Non-Vote: 2,546
18 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTs
NOTES
ANNUAL REPORT NOTES 19
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers ten equity funds that invest in the
stocks of growing companies, both domestically and internationally. The
philosophy behind these growth funds focuses on three important principles.
First, the funds seek to own successful companies, which we define as those with
growing earnings and revenues. Second, we attempt to keep the funds fully
invested, regardless of short-term market activity. Experience has shown that
market gains can occur in unpredictable spurts and that missing those
opportunities can significantly limit the potential for gain. Third, the funds
are managed by teams, rather than by one "star." We believe this allows us to
make better, more consistent management decisions.
In addition to these principles, each fund has its own investment policies.
TWENTIETH CENTURY GIFTRUST generally invests in the securities of small
companies that exhibit accelerating growth. Shares of Giftrust can be given only
as a gift, and all investments must remain in the fund for a minimum of 10 years
or until the recipient reaches the age of majority, whichever is later. The fund
is subject to significant price volatility but offers high long-term growth
potential.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500 publicly
traded U.S. companies that are considered to be leading firms in dominant
industries. Created by Standard & Poor's Corporation, it is considered to be a
broad measure of U.S. stock market performance.
The S&P MIDCAP 400 is a capitalization-weighted index of the stocks of the
400 largest leading U.S. companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
The RUSSELL 2000 INDEX was created by the Frank Russell Company. It measures
the performance of the 2,000 smallest of the 3,000 largest publicly-traded U.S.
companies, based on total market capitalization. The Russell 2000 represents
approximately 10% of the total market capitalization of the top 3,000 companies.
The index is further broken down into two mutually exclusive indices. The
RUSSELL 2000 GROWTH INDEX, used in this report, measures the performance of
those Russell 2000 companies with higher price-to-book ratios and higher
forecasted growth rates.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
- --------------------------------------------------------------------------------
Portfolio Managers Glenn Fogle
John Seitzer
- --------------------------------------------------------------------------------
20 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 15.
PORTFOLIO STATISTICS
NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by
dividing a company's stock price by its earnings per share, with the result
expressed as a multiple instead of as a percentage. (Earnings per share is
calculated by dividing the after-tax earnings of a corporation by its
outstanding shares.)
PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
EXPENSE RATIO-- the operating expenses of the fund, expressed as a
percentage of average net assets. Shareholders pay an annual fee to the
investment manager for investment advisory and management services. The expenses
and fees are deducted from fund income, not from each shareholder account. (See
Note 2 in the Notes to Financial Statements.)
TYPES OF STOCKS
BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staples companies.
LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
STATISTICAL TERMINOLOGY
PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
ANNUAL REPORT GLOSSARY 21
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
9712 [recycled logo]
SH-BKT-10465 Recycled
<PAGE>
ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
AMERICAN
CENTURY
GROUP
Balanced
TABLE OF CONTENTS
Report Highlights ........................................................... 1
Our Message to You .......................................................... 2
Market Perspective .......................................................... 3
Performance & Portfolio Information ......................................... 4
Management Q & A ............................................................ 5
Schedule of Investments ..................................................... 8
Statement of Assets and Liabilities .........................................13
Statement of Operations .....................................................14
Statements of Changes in Net Assets .........................................15
Notes to Financial Statements ...............................................16
Financial Highlights ........................................................19
Independent Auditors' Report ................................................21
Proxy Voting Results ........................................................22
Share Class and Retirement Account
Information .................................................................25
Background Information
Investment Philosophy and Policies ...............................28
Comparative Indices ..............................................28
Investment Team Leaders ..........................................28
Glossary ....................................................................29
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
Balanced
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* We are in the midst of the third-longest economic expansion since World War
II. This expansion is unique because there are so few signs of inflation.
* Returns for the period show that stocks clearly benefited from favorable
economic conditions, but the ride wasn't smooth. The U.S. stock market hit
significant potholes in March, August and October.
* A handful of large, multinational companies continued their two-year
dominance of the stock market until August, when Coca-Cola and Gillette
announced earnings disappointments.
* October saw another stock market reversal as investors reacted to news of
currency devaluations across Southeast Asia.
* U.S. bonds provided solid returns for the period, ranging from 6% for
two-year Treasury notes to over 13% for 30-year Treasury bonds.
* Looking ahead, we don't think strong growth and low inflation can continue
to co-exist harmoniously. Under normal circumstances we'd be preparing for
higher inflation, but overseas turmoil could put a damper on growth.
BALANCED
INVESTOR CLASS(1)
TOTAL RETURNS: AS OF 10/31/97
6 Months 14.14%(2)
1 Year 16.34%
NET ASSETS: $926.1 million
(AS OF 10/31/97)
INCEPTION DATE: 10/20/88
TICKER SYMBOL: TWBIX
(1) See Share Classes, page 25.
(2) Not annualized.
MANAGEMENT Q & A
* Balanced rebounded strongly from a disappointing first six months to post a
solid return for the fiscal year.
* The biggest rebound occurred in the fund's stock portfolio, which
outperformed the S&P 500 in the second half of the fiscal year after
significantly underperforming it during the first half.
* In the second half, the stock portfolio benefited from the same smaller-cap
stocks that hurt it in the first half. Pharmaceutical and energy services
companies provided much of the backbone for the recovery.
* The bond portfolio also enjoyed stronger performance during the second half
of the period. Bonds benefited from falling interest rates as inflation
remained low despite strong economic growth.
* We kept the bond portfolio's interest rate sensitivity close to neutral
because of interest rate uncertainty. We focused on adding value by
investing in corporate bonds, mortgage-backed securities and other
asset-backed securities that offered attractive yields.
Many of the investment terms in this report are defined in the Glossary on page
29.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers, Jr. and James E. Stowers III]
The stock market's bull run continued in 1997, though there were a few
stumbles. The volatility we experienced at the end of the Balanced fund's fiscal
year helped demonstrate the benefits of a risk-adjusted investment approach. As
we would expect in an equity bull market, the fund's 16.34% total return
(Investor Class shares) for the period trailed most stocks, but Balanced
provided a smoother ride than most stock investors experienced. For example,
during August, when the S&P 500 fell 5.75%, Balanced's decline was 3.22%. In
October, when the S&P 500 fell 3.45%, Balanced fell just 1.76%. We are very
pleased that Balanced met its investment objectives during a volatile period.
As a company, we are taking steps to further strengthen the range and
quality of investment services we can provide to you. We announced in July that
J.P. Morgan had agreed to become a significant minority shareholder of American
Century Companies, Inc. J.P. Morgan has been in business for more than 150
years, serving institutions, governments and individuals with complex financial
needs.
Within the framework of the proposed relationship, American Century will
continue to operate as an independent company. Our corporate management team
will remain the same, and the Stowers family will retain voting control of the
company. No changes in your fund's investment managers, policies or fees are
anticipated as a result of this transaction.
Another step we took was to begin to address the year 2000 problem. As
detailed in numerous news reports, many of the world's computer systems are at
risk because they cannot distinguish between the years 2000 and 1900. A team of
computer professionals is reviewing each of American Century's systems and
programs to identify and fix those that could cause problems. Our goal is to
have all of our computer systems and programs 100% year-2000 compliant by the
end of 1998.
On a more personal note, 1998 will be a landmark year for another reason. It
marks 40 years since we launched our first two funds, Twentieth Century Growth
and Twentieth Century Select. Not many fund companies have a 40-year track
record, nor have many built a fund family that consists of nearly 70 stock,
bond, money market and diversified funds to help you achieve your financial
goals.
We're proud of the investment opportunities and services we can offer you,
and we're looking forward to adding many more distinctive products for your use
in the coming years.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
[line graph - data below]
MARKET PERFORMANCE MEASUREMENTS
Comparative growth of $1.00 for the year ended October 31, 1997
LEHMAN INTERMEDIATE
S&P 500 BLENDED INDEX GOVT/CORP BOND INDEX
Oct-96 $1.00 $1.00 $1.00
Nov-96 $1.07 $1.05 $1.01
Dec-96 $1.06 $1.04 $1.01
Jan-97 $1.12 $1.08 $1.01
Feb-97 $1.13 $1.08 $1.01
Mar-97 $1.08 $1.05 $1.01
Apr-97 $1.15 $1.10 $1.02
May-97 $1.21 $1.14 $1.03
Jun-97 $1.27 $1.18 $1.04
Jul-97 $1.37 $1.25 $1.06
Aug-97 $1.29 $1.20 $1.05
Sep-97 $1.37 $1.25 $1.06
Oct-97 $1.32 $1.22 $1.07
Comparative one-year returns for the year ended October 31, 1997
S&P 500 32.10%
Blended Index 22.26%
Lehman Intermediate Govt/Corp Bond Index 7.49%
SOURCE: LIPPER ANALYTICAL SERVICES, INC.
LOW INFLATION, STRONG GROWTH
The latest U.S. economic expansion reached 80 months on October 31, 1997,
making it the third longest since World War II. The longest was 106 months in
the 1960s, followed by 92 months in the 1980s. What differentiates the '90s
expansion from those in the '60s and '80s is low inflation, with an average
annual rate of just over 2% during the '90s. Wage pressure, a key component of
inflation, hasn't materialized despite the lowest unemployment rates since the
early 1970s. Corporate restructurings and technological advances have increased
productivity more rapidly than the demand for labor.
The absence of inflationary pressure has helped keep interest rates low,
reducing corporate borrowing costs. As a result, corporate profit margins are at
their highest levels since the late 1960s, boosting the U.S. economy. It grew at
a torrid 4.9% annual pace in the first quarter of 1997, the strongest quarter in
more than nine years. Growth in the second and third quarters remained very
strong, at an annual rate of 3.3%.
U.S. STOCK MARKET
U.S. stock performance, represented by the S&P 500 in the accompanying graph
and table, reflected the U.S. economy's strong growth during the year ended
October 31, 1997. The ride was not smooth, however, with sizeable dips in March,
August and October, which show up clearly in the graph above. A handful of
large, multinational companies continued their two-year dominance of the stock
market until August, when Coca-Cola and Gillette announced earnings
disappointments. Other large companies followed with similar announcements,
causing the S&P 500 to drop 5.8% for the month. Stock prices resumed their
upward move in September, but October saw another reversal as the market reacted
to news of currency devaluations across Southeast Asia. Those devaluations sent
stocks plummeting in such emerging markets as Thailand, Malaysia and Singapore.
U.S. investors' attention increased when the panic selling reached Hong Kong and
European markets. The S&P 500 dropped 3.5% in October amid fears that the
sell-off overseas would translate into reduced corporate profits for U.S.
multinational companies in 1998.
U.S. BOND MARKET
U.S. bonds provided solid returns for the year. Bonds benefited from low
inflation, stock market turmoil and other favorable supply and demand factors
that caused yields to fall and prices to rise. In the Treasury market, total
returns ranged from 6% for two-year notes to over 13% for 30-year bonds. Bond
supply fell and demand rose due to the narrowing U.S. budget deficit and
increased appetite for high-quality debt from both overseas and equity
investors. The shrinking federal budget deficit allowed the U.S. Treasury to
reduce its bond issuance to finance government debt, which reduced the supply of
fixed-income securities. On the demand side, investors turned to U.S. bonds as a
safe haven from equity-market volatility and for their high "real" interest
rates (nominal interest rates minus inflation). U.S. interest rates were
generally higher than foreign rates as rates fell in Europe and parts of Asia,
and remained low in Japan.
ANNUAL REPORT MARKET PERSPECTIVE 3
<TABLE>
<CAPTION>
PERFORMANCE & PORTFOLIO INFORMATION
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS LIFE OF FUND
- --------------------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS (inception 10/20/88)
<S> <C> <C> <C> <C> <C>
Balanced ............................. 14.14% 16.34% 15.58% 11.69% 12.66%
Blended Index ........................ 11.36% 22.26% 19.93% 14.57% 13.77%(2)
- --------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (inception 1/6/97)
Balanced 14.07% .................................................... 13.42%
Blended Index 11.36% .................................................... 13.31%(3)
- ----------
</TABLE>
(1) Returns for periods less than one year are not annualized.
(2) Return from 10/31/88, the date nearest the class' inception for which data
are available.
(3) Return from 1/31/97, the date nearest the class' inception for which data
are available.
See pages 25, 28 and 29 for more information about share classes, the Blended
Index and returns.
[mountain graph - data below]
GROWTH OF $10,000 OVER LIFE OF FUND (Investor Class)
$10,000 investment 10/31/88*
BALANCED BLENDED INDEX
10/31/88 $10,000 $10,000
10/31/89 $12,095 $12,005
10/31/90 $11,841 $11,764
10/31/91 $16,924 $14,766
10/31/92 $17,032 $16,237
10/31/93 $19,356 $18,363
10/31/94 $19,177 $18,692
10/31/95 $22,314 $22,740
10/31/96 $25,448 $26,897
10/31/97 $29,607 $33,651
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost. Data quoted is for Investor Class only; performance for other
classes will vary due to differences in fee structure (see the Total Returns
table above).
The line representing Balanced's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the total
return line of the Blended Index does not.
*10/31/88 is the date closest to Investor Class inception for which comparable
performance data exists. The class' actual inception date is 10/20/88.
[pie charts]
ASSET ALLOCATION (as of October 31, 1997)
Common Stocks 58%
Corporate Bonds 24%
U.S. Treasury Securities 7%
Mortgage- & Asset-Backed Securities 6%
Other 5%
4 PERFORMANCE & PORTFOLIO INFORMATION AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q & A
An interview with Bruce Wimberly and Jeff Houston, portfolio managers on the
Balanced fund investment team.
Note: All fund returns referenced in this interview are for Investor Class
shares.
HOW DID THE FUND PERFORM?
Balanced rebounded dramatically from a disappointing first six months to
post a solid 16.34% return for the fiscal year ended October 31, 1997. This
return represents the combined performance of the fund's stock and bond
portfolios. Stocks represent approximately 60% of the fund's assets, while the
remaining assets are invested in bonds. Balanced's mix of stocks and bonds is
designed to provide investors with long-term growth and less volatility than
funds that are 100% invested in growth stocks.
HOW DID THE FUND'S STOCK PORTFOLIO PERFORM?
The biggest rebound occurred in the fund's stock portfolio, which
outperformed the S&P 500 in the second half of the fiscal year after
underperforming it during the first half. For the entire one-year period, the
stock portfolio's total return was 21.77%, which included a lackluster 1.93% in
the first half and an impressive 19.47% in the second half. The S&P 500's
performance for the same periods was 32.10% (one year), 14.74% (first half) and
15.14% (second half).
HOW DID THE FUND'S BOND PORTFOLIO PERFORM?
The bond portfolio provided more consistent returns, though it too enjoyed a
rebound in the second half of the year. The bond portfolio's total return for
the entire year was 7.69%, beating the 7.49% total return of the Lehman
Intermediate Government/Corporate Bond Index. During the second half of the
year, the bond portfolio's return was 6.12%, compared to 1.48% in the first
half.
HOW DID THE FUND PERFORM AGAINST ITS BLENDED BENCHMARK INDEX?
The benchmark is a blended index that combines the S&P 500 and the Lehman
Intermediate Government/Corporate Bond Index in proportion to the 60% stock/40%
bond asset mix of the fund. The fund beat the blended index during the second
half of
[bar chart - data below]
BALANCED ONE-YEAR RETURNS OVER THE LIFE OF THE FUND (Periods ending October 31)
BALANCED BLENDED INDEX
10/31/89 20.95% 20.05%
10/31/90 -2.11% -1.54%
10/31/91 42.93% 25.58%
10/31/92 0.64% 9.97%
10/31/93 13.65% 12.92%
10/31/94 -0.93% 1.54%
10/31/95 16.36% 20.86%
10/31/96 14.04% 16.77%
10/31/97 16.34% 22.26%
This chart illustrates Balanced's returns since its inception and compares them
with the Blended Index's returns. The fund's total returns include operating
expenses, while the index's returns do not. See page 28 for a description of the
index. Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
(1) Investor Class.
ANNUAL REPORT MANAGEMENT Q & A 5
MANAGEMENT Q & A
the year, but it trailed for the full year because of the underperformance of
the stock portfolio in the first half. The index's total return for the full
year was 22.26%, compared to 16.34% for the fund.
WHY DID THE STOCK PORTFOLIO BOUNCE BACK AND BEAT THE S&P 500 IN THE SECOND HALF?
In the second half, the stock portfolio was aided by the same factors that
hurt it in the first half. Large-cap stocks generally outperformed the stocks of
mid- and small-cap companies during the first half, and the stocks of small- and
mid-cap companies generally rebounded in the second half.
The behavior of the fund's stock portfolio changed after we purchased some
attractive smaller-cap stocks at the end of 1996. We believed that blending
these smaller, faster-growing companies with the fund's traditional holdings of
larger, blue-chip firms would enhance returns over time. Adding these
smaller-cap stocks meant that Balanced's stock portfolio was more growth
oriented and potentially more volatile than the S&P 500. That proved to be the
case in 1997, both on the downside and the upside.
WHAT STOCKS CONTRIBUTED MOST TO THE FUND'S REBOUND?
Pharmaceutical and energy services companies provided much of the backbone
for the recovery. Among pharmaceuticals, Warner-Lambert Co. was one of the
fund's best performers and also one of its top holdings at the end of the
period. This year, Warner-Lambert earned regulatory approval for two new drugs
that combat problems associated with diabetes and high cholesterol. The profit
margins for these new products are much higher than those of the
over-the-counter health and beauty aids that were once the company's mainstay.
We think Warner-Lambert will be able to sustain its current high earnings growth
rate, thanks to its new products. New drugs, combined with the favorable
demographic trends of the aging U.S. population, give us confidence that many
companies in the drug industry will continue to sustain above-average growth
rates. Other pharmaceutical companies in the portfolio that performed well
included Eli Lilly & Co. and Pfizer, Inc.
The fund's energy holdings provide a great example of stocks that
underperformed in the first half of the fiscal year, then outperformed in the
second half. In Balanced's semiannual report (April 30, 1997), we discussed the
disappointing performance of the fund's oil-drilling holdings, including Global
Marine, Inc. and Falcon Drilling Co., Inc. After years of fundamental
restructuring and increased productivity in the industry because of new
technology, we believed accelerating earnings were sustainable because of
increasing demand for new oil supplies. Despite losses in early 1997 when oil
and gas prices slipped, we decided to hold onto these stocks, and our patience
paid off. Both companies were among Balanced's top performers for the year.
TOP TEN EQUITY HOLDINGS % of equity portfolio
As of As of
10/31/97 4/30/97
Tyco International Ltd. 6.6% --
Warner-Lambert Co. 5.5% 4.1%
Lilly (Eli) & Co. 4.2% 3.1%
General Electric Co. (U.S.) 4.1% 3.8%
Bristol-Myers Squibb Co. 4.0% --
Phillips Electronics N.V. 3.8% 2.2%
Falcon Drilling Co. Inc. 3.7% 2.7%
Outdoor Systems, Inc. 3.4% 1.9%
Clear Channel Communications, Inc. 3.4% 2.2%
Compuware Corp. 3.3% 2.1%
TOP FIVE INDUSTRIES % of equity portfolio
As of As of
10/31/97 4/30/97
Pharmaceuticals 19.6% 20.1%
Diversified Companies 12.1% 7.7%
Energy (Services) 10.2% --
Electrical & Electronic Components 7.7% 12.1%
Consumer Products 7.1% 6.7%
6 MANAGEMENT Q & A AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q & A
WHICH STOCKS IN THE FUND'S PORTFOLIO DIDN'T BOUNCE BACK?
In general, companies that didn't meet their earnings estimates were
punished by the market. One example was Oxford Health Plans, a managed-care
company. In the third quarter, Oxford developed internal control problems as it
attempted to implement a new billing and bookkeeping system. The company's
unexpected announcement of poor third-quarter earnings happened to coincide with
the market's October correction, and Oxford's share price dropped significantly.
HOW WAS THE BOND PORTFOLIO POSITIONED DURING THE SECOND HALF?
In general, we take a "plain vanilla" approach to the bond portfolio to
complement the stock portfolio and generate the best possible risk-adjusted
returns for the fund as a whole. We typically invest primarily in
intermediate-term corporate bonds, and we usually don't make large duration
bets, focusing instead on adding value by investing in undervalued,
higher-yielding bond sectors. We consider the fund's neutral duration to be
approximately 4.25 years, and we usually don't stray too far from that position.
We were even less inclined than usual to change the fund's duration during
the period because there was so much uncertainty about interest rates. On one
hand, the U.S. economy was growing at levels that would have been considered
inflationary in the past. The Federal Reserve did raise short-term interest
rates in March, leading to speculation that other interest rate increases were
just around the corner. But inflation never spiked as expected, and the turmoil
in Southeast Asia may actually have a disinflationary effect on the U.S.
economy. As a result, we basically stood pat.
WHAT'S YOUR OUTLOOK FOR BONDS AND THE BOND PORTFOLIO?
It's late in the business cycle, so we're planning to be a little more
cautious about buying corporate bonds and will look instead to find value in
mortgage- and asset-backed securities. We're not giving up completely on
corporates, however. Until it was interrupted in October by events in Southeast
Asia, one of the prevalent themes in the corporate bond market in 1997 was the
continued narrowing of the difference, or spread, between the yields of
corporate and treasury securities due to improving U.S. corporate health. We
still like corporate bonds because U.S. companies are still in very good shape.
Our ongoing commitment to the corporate market is demonstrated by our
willingness to hold a relatively high percentage of BBB-rated securities (see
the accompanying table).
With regard to inflation and interest rates, we plan to keep the portfolio's
duration close to neutral, and we'll keep our eyes on the labor market and wages
for clues to future price increases. We still have concerns about cyclical
inflation, especially if economic growth stays above 2%, but the situation in
Southeast Asia could put a significant damper on growth and inflation in 1998.
BALANCED'S FIXED-INCOME PORTFOLIO
As of As of
10/31/97 4/30/97
Portfolio Sensitivity to Interest Rates
Weighted Average Maturity 6.37 years 6.28 years
Duration 4.31 years 4.10 years
Portfolio Credit Quality % of fixed income portfolio
(S&P Ratings)
AAA 39% 41%
AA 10% 6%
A 34% 36%
BBB 17% 17%
----- -----
100% 100%
===== =====
See Glossary on page 29.
ANNUAL REPORT MANAGEMENT Q & A 7
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
COMMON STOCKS
<S> <C> <C>
AEROSPACE & DEFENSE-0.4%
135,000 BE Aerospace, Inc.(1) $ 3,788
------------------
AUTOMOBILES & AUTO PARTS-0.2%
40,000 PACCAR Inc. 1,801
------------------
BANKING-2.7%
135,000 BankAmerica Corp. 9,652
105,000 Charter One Financial, Inc. 6,103
75,000 Citicorp 9,380
------------------
25,135
------------------
BROADCASTING & MEDIA-4.0%
276,700 Clear Channel Communications, Inc.(1) 18,262
600,000 Outdoor Systems, Inc.(1) 18,450
------------------
36,712
------------------
COMMUNICATIONS EQUIPMENT-0.5%
80,000 Motorola, Inc. 4,940
------------------
COMMUNICATIONS SERVICES-0.2%
65,000 Worldcom, Inc.(1) 2,184
------------------
COMPUTER PERIPHERALS-1.2%
140,000 Cisco Systems Inc.(1) 11,484
------------------
COMPUTER SOFTWARE & SERVICES-3.7%
137,300 BMC Software, Inc.(1) 8,272
270,000 Compuware Corp.(1) 17,820
110,000 Electronics for Imaging, Inc.(1) 5,136
75,000 Oracle Systems Corp.(1) 2,684
------------------
33,912
------------------
COMPUTER SYSTEMS-3.1%
190,000 Compaq Computer Corp.(1) 12,112
120,000 International Business Machines Corp. 11,768
135,000 Sun Microsystems, Inc.(1) 4,620
------------------
28,500
------------------
CONSUMER PRODUCTS-4.1%
197,000 Avon Products, Inc. 12,903
100,000 Gillette Company 8,906
150,000 Procter & Gamble Co. (The) 10,200
130,000 Sunbeam Corp. 5,891
------------------
37,900
------------------
Shares ($ in Thousands) Value
- ---------------------------------------------------------------------------------------------
DIVERSIFIED COMPANIES-7.0%
340,000 General Electric Co. (U.S.) $ 21,951
940,000 Tyco International Ltd. 35,485
275,000 U.S. Industries, Inc. 7,391
------------------
64,827
------------------
ELECTRICAL & ELECTRONIC
COMPONENTS-4.5%
125,000 Altera Corp.(1) 5,543
90,000 Intel Corp. 6,933
150,000 KLA-Tencor Corporation(1) 6,577
260,000 Phillips Electronics N.V. 20,377
17,000 Texas Instruments Inc. 1,814
------------------
41,244
------------------
ENERGY (PRODUCTION & MARKETING)-1.5%
210,000 Energy Ventures, Inc.(1) 13,479
------------------
ENERGY (SERVICES)-5.9%
250,000 Diamond Offshore Drilling, Inc. 15,562
550,000 Falcon Drilling Co. Inc.(1) 20,006
140,000 Global Marine Inc.(1) 4,358
550,000 Input/Output, Inc.(1) 14,747
------------------
54,673
------------------
ENVIRONMENTAL SERVICES-0.8%
210,000 USA Waste Services, Inc.(1) 7,770
------------------
FINANCIAL SERVICES-0.4%
80,000 Federal National Mortgage Association 3,875
------------------
FOOD & BEVERAGE-0.7%
205,000 Panamerican Beverages Inc. Cl A 6,355
------------------
HEALTHCARE-0.7%
80,000 Cardinal Health, Inc. 5,940
14,100 Oxford Health Plans, Inc.(1) 364
------------------
6,304
------------------
INSURANCE-2.9%
355,000 Conseco Inc. 15,487
325,000 SunAmerica, Inc. 11,680
------------------
27,167
------------------
PHARMACEUTICALS-11.4%
245,000 Bristol-Myers Squibb Co. 21,499
340,000 Lilly (Eli) & Co. 22,737
70,000 Merck & Co., Inc. 6,248
5,653 Novartis AG ORD 8,846
See Notes to Financial Statements
8 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Shares/Principal Amount ($ in Thousands) Value
- ----------------------------------------------------------------------------------------
230,000 Pfizer, Inc. $ 16,273
205,000 Warner-Lambert Co. 29,353
------------------
104,956
------------------
TEXTILES & APPAREL-1.9%
377,300 Samsonite Corp.(1) 17,450
------------------
TOTAL COMMON STOCKS-57.8% 534,456
------------------
(Cost $379,402)
U.S. TREASURY SECURITIES
$ 5,000 U.S. Treasury Notes,
6.00%, 9/30/98 5,022
1,000 U.S. Treasury Notes,
6.375%, 5/15/00 1,017
4,075 U.S. Treasury Notes,
7.75%, 2/15/01 4,320
2,000 U.S. Treasury Notes,
6.625%, 6/30/01 2,057
17,150 U.S. Treasury Notes,
6.25%, 8/31/02 17,493
9,000 U.S. Treasury Notes,
5.75%, 8/15/03 8,978
7,300 U.S. Treasury Notes,
7.25%, 5/15/04 7,857
5,000 U.S. Treasury Notes,
7.25%, 8/15/04 5,389
4,200 U.S. Treasury Notes,
5.875%, 11/15/05 4,193
2,400 U.S Treasury Notes,
7.00%, 7/15/06 2,575
3,000 U.S. Treasury Notes,
6.125%, 8/15/07 3,067
4,950 U.S. Treasury Bonds,
7.625%, 2/15/25 5,856
------------------
TOTAL U.S. TREASURY SECURITIES-7.3% 67,824
------------------
(Cost $66,163)
U.S. GOVERNMENT AGENCY SECURITIES-0.5%
4,000 FNMA MTN,
7.49%, 5/22/07 4,134
------------------
(Cost $4,019)
MORTGAGE-BACKED SECURITIES(2)
726 FHLMC Series 106-EPAC REMIC,
6.95%, 2/15/20 732
Principal Amount ($ in Thousands) Value
- -------------------------------------------------------------------------------------------------
$ 2,000 FHLMC Series 77-HPAC REMIC,
8.50%, 9/15/20 $ 2,187
100 FNMA 89 Series 85-DPAC REMIC,
7.60%, 5/25/18 100
1,003 FNMA 90 Series 98-HPAC REMIC,
7.50%, 10/25/19 1,006
6,970 FNMA Pool #050985,
6.00%, 3/1/00 6,878
7,661 FNMA Pool #250627,
8.00%, 7/1/26 7,947
7,064 GNMA Pool #002202,
7.00%, 4/20/26 7,083
------------------
TOTAL MORTGAGE-BACKED SECURITIES-2.8% 25,933
------------------
(Cost $25,355)
ASSET-BACKED SECURITIES(2)
3,750 FNMA Whole Loan, Series 1995-W1,
Class A6, 8.10%, 4/25/25 3,884
5,000 First Merchants Auto Receivables
Corp., Series 1996-B, Class A2,
6.80%, 5/15/01 5,101
5,000 NationsBank Auto Owner Trust, Series
1996-A, Class B1, 6.75%, 6/15/01 5,094
5,000 Premier Auto Trust, Series 1996-4,
Class CTFS, 6.65%, 8/6/02 5,065
3,000 Union Acceptance Corp., Series
1996-D, Class A3, 6.30%, 1/8/04 3,031
3,200 United Companies Financial Corp.,
Series 1997-C, Class A7,
6.85%, 2/15/04 3,244
2,100 United Companies Financial Corp.,
Series 1996-D1, Class A5,
6.92%, 10/15/18 2,144
4,350 United Companies Financial Corp.,
Series 1996-D1, Class A4,
6.78%, 2/15/16 4,424
------------------
TOTAL ASSET-BACKED SECURITIES-3.5% 31,987
------------------
(Cost $31,416)
CORPORATE BONDS
AUTOMOBILES & AUTO PARTS-2.0%
6,500 Ford Motor Credit Corp.,
6.75%, 5/15/05 6,622
7,000 General Motors Acceptance Corp.
MTN, 6.375%, 10/12/99 7,052
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 9
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 5,000 General Motors Acceptance Corp.
MTN, 5.45%, 2/22/00 $ 4,938
------------------
18,612
------------------
BANKING-3.3%
5,000 ABN Amro Bank NV (Chicago),
7.125%, 6/18/07 5,200
4,000 Capital One Financial Corp.,
8.125%, 3/1/00 4,150
5,000 First Union Corp.,
8.77%, 11/15/04 5,262
5,150 NationsBank Capital Trust III, VRN, 6.31%, 1/15/98, resets
quarterly off the 3-month LIBOR plus 0.55%
with no caps 5,086
5,000 NationsBank Corp.,
6.875%, 2/15/05 5,100
5,150 Santander Financial Issuances Ltd.,
7.00%, 4/1/06 5,305
------------------
30,103
------------------
COMMUNICATIONS SERVICES-0.8%
3,000 GTE South,
7.25%, 8/1/02 3,143
4,500 WorldCom, Inc.,
7.55%, 4/1/04 4,708
------------------
7,851
------------------
DIVERSIFIED COMPANIES-0.6%
5,000 Hanson Overseas BV,
6.75%, 9/15/05 5,094
------------------
ELECTRICAL & ELECTRONIC
COMPONENTS-0.7%
6,000 Anixter International Inc.,
8.00%, 9/15/03 6,330
------------------
FINANCIAL SERVICES-5.9%
2,800 Advanta Corp., MTN, Series B,
7.00%, 5/1/01 2,803
3,500 Associates Corp., N.A.,
6.375%, 10/15/02 3,531
4,000 Associates First Capital Corp.,
6.75%, 7/15/01 4,090
5,000 First USA, Inc.,
7.00%, 8/20/01 5,144
3,000 Greyhound Financial Corp.,
6.75%, 3/25/99 3,037
Principal Amount ($ in Thousands) Value
- -------------------------------------------------------------------------------------------------
$ 6,000 Lehman Brothers Holdings, Inc.,
6.625%, 11/15/00 $ 6,053
3,000 Lehman Brothers, Inc.,
5.75%, 11/15/98 2,996
3,000 Money Store Inc. (The),
8.05%, 4/15/02 3,120
5,300 Morgan Stanley, Dean Witter,
Discover & Co., 6.875%, 3/1/07 5,432
6,000 Norwest Financial, Inc.,
6.25%, 11/1/02 6,075
7,000 Salomon, Inc.,
6.65%, 7/15/01 7,096
5,000 Travelers/Aetna Property
Casualty Corp., 6.75%, 4/15/01 5,100
------------------
54,477
------------------
INSURANCE-2.0%
5,000 Aetna Services Inc.,
6.75%, 8/15/01 5,119
3,750 Nationwide Mutual Insurance Co.,
6.50%, 2/15/04 (Acquired 2/9/96,
Cost $3,782)(3) 3,731
5,000 Underwriters Reinsurance Co.,
7.875%, 6/30/06 (Acquired
8/6/96, $5,156)(3) 5,394
4,000 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired 5/28/97 through
6/11/97, Cost $4,039)(3) 4,400
------------------
18,644
------------------
LEISURE-0.8%
4,200 Hilton Hotels,
7.00%, 7/15/04 4,247
2,750 Time Warner Inc.,
6.85%, 1/15/26 2,829
------------------
7,076
------------------
METALS & MINING-0.8%
6,750 Barrick Gold Corp.,
7.50%, 5/1/07 7,138
------------------
REAL ESTATE-1.8%
1,100 Chelsea GCA Realty,
7.25%, 10/21/07 1,111
6,800 Price REIT, Inc. (The),
7.25%, 11/1/00 6,962
3,800 Price REIT, Inc. (The),
7.125%, 6/15/04 3,890
See Notes to Financial Statements
10 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
$ 5,000 Spieker Properties, Inc.,
6.80%, 12/15/01 $ 5,094
------------------
17,057
------------------
RETAIL (GENERAL MERCHANDISE)-0.7%
2,500 Dayton Hudson Corp.,
9.25%, 3/1/06 2,712
4,000 Sears, Roebuck & Co., MTN,
7.12%, 6/4/04 4,175
------------------
6,887
------------------
TOBACCO-1.3%
3,500 Philip Morris Companies Inc.,
6.80%, 12/1/03 3,531
5,500 Philip Morris Companies Inc.,
6.95%, 6/1/06 5,651
3,000 Philip Morris Companies, Inc.,
7.00%, 7/15/05 3,049
------------------
12,231
------------------
UTILITIES-2.4%
12,000 CalEnergy Co., Inc.,
7.63%, 10/15/07 12,150
2,000 Kansas Power & Light Co.,
8.875%, 3/1/00 2,115
5,600 Public Service Electric & Gas Co.,
6.00%, 5/1/00 5,600
2,000 Texas Utilities Electric Co.,
8.125%, 2/1/02 2,140
------------------
22,005
------------------
TOTAL CORPORATE BONDS-23.1% 213,505
------------------
(Cost $208,111)
FOREIGN CORPORATE BONDS
6,350 Hutchison Whampoa Financial,
Series A, 6.95%, 8/1/07 (Acquired
8/21/97 through 9/12/97,
Cost $6,229)(3) 5,890
2,000 Hutchison Whampoa Financial,
Series B, 7.45%, 8/1/17 (Acquired
7/24/97, Cost $1,998)(3) 1,822
------------------
TOTAL FOREIGN CORPORATE BONDS-0.8% 7,712
------------------
(Cost $8,227)
Principal Amount ($ in Thousands) Value
- -------------------------------------------------------------------------------------------------
SOVEREIGN GOVERNMENTS & AGENCIES
$ 6,000 Hydro-Quebec, MTN,
7.02%, 3/23/05 $ 6,210
4,125 Korea Development Bank,
6.50%, 11/15/02 3,851
5,000 Korea Electric Power,
6.375%, 12/1/03 4,694
------------------
TOTAL SOVEREIGN GOVERNMENTS
& AGENCIES-1.6% 14,755
------------------
(Cost $14,696)
TEMPORARY CASH INVESTMENTS
Repurchase Agreement, Goldman Sachs & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 10/31/97,
due 11/3/97 (Delivery value $18,109) 18,100
Repurchase Agreement, Morgan Stanley Group,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.60%, dated 10/31/97,
due 11/3/97 (Delivery value $6,303) 6,300
------------------
TOTAL TEMPORARY CASH INVESTMENTS-2.6% 24,400
------------------
(Cost $24,400)
TOTAL INVESTMENT SECURITIES-100.0% $924,706
===================
(Cost $761,789)
</TABLE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
($ in Thousands)
Contract Settlement Unrealized
to Sell Date Value Loss
- -----------------------------------------------------------------------
9,936,397 CHF 11/28/97 $7,109 $(117)
======== ========
(Value on Settlement Date $7,226)
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 11
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
NOTES TO SCHEDULE OF INVESTMENTS
CHF = Swiss Franc
FHLMC = Federal Home Loan Mortgage Corporation
FNMA = Federal National Mortgage Association
GNMA = Government National Mortgage Association
LIBOR = London Interbank Offered Rate
MTN = Medium Term Note
ORD = Foreign Ordinary Share
VRN = Variable Rate Note. Interest reset date is indicated and used in
calculating the weighted average portfolio maturity. Rate shown is
effective October 31, 1997.
resets= The frequency with which a fixed-income security's coupon changes,
based on current market conditions or an underlying index. The more
frequently a security resets, the less risk the investor is taking that
the coupon will vary significantly from current market rates.
(1) Non-income producing.
(2) Final maturity indicated. Expected remaining maturity used for purposes of
calculating the weighted average portfolio maturity.
(3) Security was purchased under Rule 144A of the Securities Act of 1933 and,
unless registered under the Act or exempted from registration, may only be
sold to qualified institutional investors. The aggregate value of
restricted securities at October 31, 1997, was $21,237, which represented
2.3% of the net assets.
See Notes to Financial Statements
12 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
ASSETS ($ In Thousands)
Investment securities, at value
(identified cost of $761,789) (Note 3) ......................... $ 924,706
Cash ........................................................... 3,557
Receivable for investments sold ................................ 8,162
Dividends and interest receivable .............................. 6,365
-----------
942,790
-----------
LIABILITIES
Disbursements in excess of demand deposit cash ................. 880
Payable for forward foreign currency exchange contracts ........ 117
Payable for investments purchased .............................. 8,437
Payable for capital shares redeemed ............................ 679
Accrued management fees (Note 2) ............................... 814
Distribution fees payable (Note 2) ............................. 1
Service fees payable (Note 2) .................................. 1
-----------
10,929
-----------
Net Assets ..................................................... $ 931,861
===========
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ........................ $ 691,438
Undistributed net investment income ............................ 2,562
Accumulated undistributed net realized gain on
investment and foreign currency transactions ................... 75,060
Net unrealized appreciation on investments and translation
of assets and liabilities in foreign currencies (Note 3) ....... 162,801
-----------
$ 931,861
===========
Investor Class, $0.01 Par Value ($ and shares in full)
Net assets ..................................................... $926,137,09
Shares outstanding ............................................. 47,361,687
Net asset value per share ...................................... $ 19.55
Advisor Class, $0.01 Par Value ($ and shares in full)
Net assets ..................................................... $ 5,723,526
Shares outstanding ............................................. 292,733
Net asset value per share ...................................... $ 19.55
See Notes to Financial Statements
ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES 13
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
INVESTMENT INCOME ($ In Thousands)
Income:
Interest ........................................................ $ 24,540
Dividends (net of foreign taxes withheld of $23) ................ 3,958
---------
28,498
---------
Expenses (Note 2):
Management fees ................................................. 9,022
Distribution fees - Advisor Class ............................... 8
Shareholder service fees - Advisor Class ........................ 8
Directors' fees and expenses .................................... 9
---------
9,047
---------
Net investment income ........................................... 19,451
---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCY (NOTE 3)
Net realized gain on:
Investments ..................................................... 75,233
Foreign currency transactions ................................... 703
---------
75,936
---------
Change in net unrealized appreciation (depreciation) on:
Investments ..................................................... 41,471
Translation of assets and liabilities in foreign currencies ..... (115)
---------
41,356
---------
Net realized and unrealized
gain on investments ............................................. 117,292
---------
Net Increase in Net Assets
Resulting from Operations ....................................... $ 136,743
=========
See Notes to Financial Statements
14 STATEMENT OF OPERATIONS AMERICAN CENTURY INVESTMENTS
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED OCTOBER 31, 1997
AND OCTOBER 31, 1996
Increase in Net Assets 1997 1996
($ In Thousands)
OPERATIONS
Net investment income ................................ $ 19,451 $ 21,381
Net realized gain on investments
and foreign currency transactions .................... 75,936 66,241
Change in net unrealized appreciation
on investments and translation of assets
and liabilities in foreign currencies ................ 41,356 24,176
...................................................... --------- ---------
Net increase in net assets
resulting from operations ............................ 136,743 111,798
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Investor Class ..................................... (20,449) (21,812)
Advisor Class ...................................... (55) --
From net realized gains from investment transactions:
Investor Class ..................................... (64,787) (46,792)
--------- ---------
Decrease in net assets from distributions ............ (85,291) (68,604)
--------- ---------
CAPITAL SHARE TRANSACTIONS (NOTE 4)
Net increase in net assets from
capital share transactions ........................... 1,241 20,404
--------- ---------
Net increase in net assets ........................... 52,693 63,598
NET ASSETS
Beginning of year .................................... 879,168 815,570
--------- ---------
End of year .......................................... $ 931,861 $ 879,168
========= =========
Undistributed net investment income .................. $ 2,562 $ 2,912
========= =========
See Notes to Financial Statements
ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS 15
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century Balanced Fund (the Fund) is one
of the thirteen series of funds issued by the Corporation. The Fund's investment
objective is to seek capital growth and current income. It is management's
intention to maintain approximately 60% of the Fund's assets in common stocks
and the remainder in bonds and other fixed income securities. The Fund is
authorized to issue three classes of shares: the Investor Class, the Advisor
Class, and the Institutional Class. The three classes of shares differ
principally in their respective shareholder servicing and distribution expenses
and arrangements. All shares of the Fund represent an equal pro rata interest in
the assets of the class to which such shares belong, and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
for class specific expenses and exclusive rights to vote on matters affecting
only individual classes. Sale of the Advisor Class commenced on January 6, 1997.
Sale of the Institutional Class had not commenced as of October 31, 1997. The
following significant accounting policies, related to all classes of the Fund,
are in accordance with accounting policies generally accepted in the investment
company industry.
SECURITY VALUATIONS--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through valuations obtained
from a commercial pricing service or at the mean of the most recent bid and
asked prices. When valuations are not readily available, securities are valued
at fair value as determined in accordance with procedures adopted by the Board
of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of discounts and accretion of premiums.
FOREIGN CURRENCY TRANSACTIONS--The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U.S. dollars at prevailing exchange rates.
Purchases and sales of investment securities, dividend and interest income, and
certain expenses are translated at the rates of exchange prevailing on the
respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U.S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on investments and unrealized appreciation (depreciation)
on investments, respectively.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--The Fund may enter into forward
foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U.S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
Fund to obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the value of the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
Fund under each repurchase agreement.
16 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income are declared and
paid quarterly. Distributions from net realized gains are declared and paid
annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
ADDITIONAL INFORMATION--Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc., and the Corporation's transfer agent, American Century Services
Corporation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee per class. Additional fees apply to the
Advisor Class, as described in the respective prospectus. The Agreement provides
that all expenses of the Fund, except brokerage commissions, taxes, interest,
expenses of those directors who are not considered "interested persons" as
defined in the Investment Company Act of 1940 (including counsel fees) and
extraordinary expenses, will be paid by ACIM. The fee is computed daily and paid
monthly based on the Fund's average daily closing net assets during the previous
month. The annual management fee is 1.00% for the Investor Class and 0.75% for
the Advisor Class.
The Board of Directors has adopted a shareholder services and distribution
plan for the Advisor Class, pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Advisor Class Master Distribution and Shareholder Services Plan
provides that the Fund will pay ACIM an annual distribution fee equal to 0.25%
and service fee equal to 0.25%. The fees are computed daily and paid monthly
based on the Advisor Class's average daily closing net assets during the
previous month. The distribution fee provides compensation for distribution
expenses incurred by financial intermediaries in connection with distributing
shares of the Advisor Class including, but not limited to, payments to brokers,
dealers, and financial institutions that have entered into sales agreements with
respect to shares of the Fund. The service fee provides compensation for
shareholder and administrative services rendered by ACIM, its affiliates or
independent third party providers. Fees incurred under the Master Distribution
and Shareholder Services Plan during the period ended October 31, 1997, were
$16,116.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 17
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for
the year ended October 31, 1997, totaled $961,875,601, of which $136,551,559
represented U.S. Treasury and Agency obligations. Sales of investment
securities, excluding short-term investments, totaled $1,025,565,774, of which
$159,373,706 represented U.S. Treasury and Agency obligations.
As of October 31, 1997, accumulated net unrealized appreciation was
$161,968,451, based on the aggregate cost of investments of $762,737,151 for
federal income tax purposes, which consisted of unrealized appreciation of
$168,109,727 and unrealized depreciation of $6,141,276.
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
There are 100,000,000 shares of the Investor Class and 50,000,000 shares of
the Advisor class authorized for issuance. Transactions in shares of the Fund
were as follows:
Shares Amount
(In Thousands)
INVESTOR CLASS
Year ended October 31, 1997
Sold ............................................. 13,169 $ 242,933
Issued in reinvestment
of distributions ................................. 4,752 83,837
Redeemed ......................................... (17,963) (330,837)
--------- ---------
Net decrease ..................................... (42) $ (4,067)
========= =========
Year ended October 31, 1996
Sold ............................................. 11,553 $ 202,311
Issued in reinvestment
of distributions ................................. 3,994 67,547
Redeemed ......................................... (14,226) (249,454)
--------- ---------
Net increase ..................................... 1,321 $ 20,404
========= =========
ADVISOR CLASS
January 6, 1997(1) through October 31, 1997
Sold ............................................. 296 $ 5,372
Issued in reinvestment
of distributions ................................. 3 55
Redeemed ......................................... (6) (119)
--------- ---------
Net increase ..................................... 293 $ 5,308
========= =========
- ----------
(1) Commencement of sale of the Advisor Class.
18 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
INVESTOR CLASS
For a Share Outstanding Throughout the Years Ended October 31 (except as noted)
1997 1996 1995 1994 1993
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ................. $ 18.55 $ 17.70 $ 15.94 $ 16.52 $ 14.89
--------- --------- --------- ------- -------
Income From Investment Operations
Net Investment Income ........... 0.40(1) 0.44(1) 0.48(1) 0.42 0.38
Net Realized and Unrealized Gain
(Loss) on Investment Transactions 2.41 1.88 2.03 (0.58) 1.62
--------- --------- --------- ------- -------
Total From
Investment Operations ........... 2.81 2.32 2.51 (0.16) 2.00
--------- --------- --------- ------- -------
Distributions
From Net Investment Income ...... (0.43) (0.46) (0.48) (0.42) (0.37)
From Net Realized Gains
on Investment Transactions ...... (1.38) (1.01) (0.27) -- --
--------- --------- --------- ------- -------
Total Distributions ............. (1.81) (1.47) (0.75) (0.42) (0.37)
--------- --------- --------- ------- -------
Net Asset Value, End of Year ...... $ 19.55 $ 18.55 $ 17.70 $ 15.94 $ 16.52
========= ========= ========= ======= =======
Total Return(2) ................. 16.34% 14.04% 16.36% (0.93)% 13.64%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............. 1.00% 0.99% 0.98% 1.00% 1.00%
Ratio of Net Investment Income
to Average Net Assets ............. 2.15% 2.50% 2.90% 2.70% 2.40%
Portfolio Turnover Rate ........... 110% 130% 85% 94% 95%
Average Commission Paid per Share
of Equity Security Traded ......... $ 0.0371 $ 0.0400 $ 0.0390 --(3) --(3)
Net Assets, End
of Year (in millions) ............. $ 926 $ 879 $ 816 $ 704 $ 706
</TABLE>
- ----------
(1) Computed using average shares outstanding throughout the period.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any.
(3) Disclosure of average commission paid per share of equity security traded
was not required prior to the year ended October 31, 1995.
See Notes to Financial Statements
ANNUAL REPORT FINANCIAL HIGHLIGHTS 19
FINANCIAL HIGHLIGHTS
ADVISOR CLASS
For a Share Outstanding Throughout the Period Ended October 31
1997(1)
PER-SHARE DATA
Net Asset Value, Beginning of Period .................. $ 17.46
-----------
Income From Investment Operations
Net Investment Income(2) ............................ 0.29
Net Realized and Unrealized Loss
on Investment Transactions ............................ 2.04
-----------
Total From Investment Operations .................... 2.33
-----------
Distributions
From Net Investment Income .......................... (0.24)
-----------
Net Asset Value, End of Period ........................ $ 19.55
===========
Total Return(3) ..................................... 13.42%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ................................. 1.25%(4)
Ratio of Net Investment Income
to Average Net Assets ................................. 1.90%(4)
Portfolio Turnover Rate ............................... 110%
Average Commission Paid per Share
of Equity Security Traded ............................. $ 0.0371
Net Assets, End of Period
(in thousands) ........................................ $ 5,724
- ----------
(1) January 6, 1997 (commencement of sale) through October 31, 1997.
(2) Computed using average shares outstanding throughout the period.
(3) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(4) Annualized.
See Notes to Financial Statements
20 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century Balanced Fund (the
"Fund"), one of the funds comprising American Century Mutual Funds, Inc.
(formerly Twentieth Century Investors, Inc.), as of October 31, 1997, and the
related statements of operations and changes in net assets for the year then
ended, and the financial highlights for the year then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit. The financial
statements and the financial highlights of the Fund for each of the years in the
four-year period ended October 31, 1996 were audited by other auditors whose
report, dated November 20, 1996, expressed an unqualified opinion on those
statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century
Balanced Fund as of October 31, 1997, the results of its operations, the changes
in its net assets, and the financial highlights for the year then ended in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 3, 1997
ANNUAL REPORT INDEPENDENT AUDITORS' REPORT 21
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the ensuing
year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 32,526,091
Withheld: 454,807
James E. Stowers III
For: 32,523,948
Withheld: 456,950
Thomas A. Brown
For: 32,545,583
Withheld: 435,315
Robert W. Doering, M.D.
For: 32,530,625
Withheld: 450,273
D.D. (Del) Hock
For: 32,537,570
Withheld: 443,328
Linsley L. Lundgaard
For: 32,524,028
Withheld: 456,870
Donald H. Pratt
For: 32,543,143
Withheld: 437,755
Lloyd T. Silver, Jr.
For: 32,538,209
Withheld: 442,689
M. Jeannine Strandjord
For: 32,543,363
Withheld: 437,535
PROPOSAL 2:
To vote on approval of a Management Agreement with American Century
Investment Management, Inc.
INVESTOR ADVISOR
For: 30,714,263 149,226
Against: 510,989 0
Abstain: 133,985 0
Broker
Non-Vote: 1,472,435 0
PROPOSAL 3:
To vote on the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 32,449,671
Against: 412,883
Abstain: 118,344
22 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification of
investments.
For: 28,764,213
Against: 2,536,611
Abstain: 207,639
Broker Non-Vote: 1,472,435
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
For: 29,370,592
Against: 1,926,656
Abstain: 211,215
Broker Non-Vote: 1,472,435
* Amend the fundamental investment limitation concerning borrowing.
For: 27,913,977
Against: 3,384,644
Abstain: 209,842
Broker Non-Vote: 1,472,435
* Amend the fundamental investment limitation concerning lending.
For: 27,908,969
Against: 3,381,983
Abstain: 217,511
Broker Non-Vote: 1,472,435
*Amend the fundamental investment limitation concerning concentration of
investments in a particular industry.
For: 28,506,130
Against: 2,795,778
Abstain: 206,555
Broker Non-Vote: 1,472,435
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 29,721,139
Against: 1,578,790
Abstain: 208,534
Broker Non-Vote: 1,472,435
* Eliminate the fundamental limitation concerning investment in other investment
companies.
For: 29,741,614
Against: 1,557,217
Abstain: 209,632
Broker Non-Vote: 1,472,435
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 29,737,085
Against: 1,557,304
Abstain: 214,074
Broker Non-Vote: 1,472,435
ANNUAL REPORT PROXY VOTING RESULTS 23
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning underwriting.
For: 29,743,870
Against: 1,547,447
Abstain: 217,146
Broker Non-Vote: 1,472,435
* Amend the fundamental investment limitation concerning commodities.
For: 29,325,436
Against: 1,967,797
Abstain: 215,230
Broker Non-Vote: 1,472,435
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 29,719,799
Against: 1,578,272
Abstain: 210,392
Broker Non-Vote: 1,472,435
* Eliminate the fundamental limitation concerning short sales.
For: 28,972,578
Against: 2,323,735
Abstain: 212,150
Broker Non-Vote: 1,472,435
* Eliminate the fundamental investment limitation concerning margin purchases of
securities.
For: 28,733,222
Against: 2,563,310
Abstain: 211,931
Broker Non-Vote: 1,472,435
24 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
SHARE CLASS AND RETIREMENT
ACCOUNT INFORMATION
SHARE CLASSES
Until September 3, 1996, Balanced issued one class of fund shares,
reflecting the fact that most investors bought their shares directly from
American Century. All investors paid the same annual unified management fee and
did not pay any commissions or other fees to purchase shares from American
Century.
Now more share purchases are made by investors through financial
intermediaries (who ordinarily are compensated for the additional services they
provide), or by very large institutional investors who expect lower costs
because of their size. In September 1996, American Century began to offer three
classes of shares for Balanced. One class is for investors who buy directly from
American Century, one is for investors who buy through financial intermediaries,
and the third is for large institutional customers.
The original class of Balanced shares is called the INVESTOR CLASS. All
shares issued and outstanding before September 3, 1996, have been designated as
Investor Class shares. Investor Class shares may also be purchased after
September 3, 1996. Investor Class shareholders do not pay any commissions or
other fees for purchase of funds shares directly from American Century.
Investors who buy Investor Class shares through a broker-dealer may be required
to pay the broker-dealer a transaction fee. THE PRICE AND PERFORMANCE OF THE
INVESTOR CLASS SHARES ARE LISTED IN NEWSPAPERS. NO OTHER CLASS IS CURRENTLY
LISTED.
In addition, there is an ADVISOR CLASS, which is sold through banks,
broker-dealers, insurance companies and financial advisors. Advisor Class shares
are subject to a 0.50% Rule 12b-1 service and distribution fee. Half of that fee
is available to pay for recordkeeping and administrative services, and half is
available to pay for distribution services provided by the financial
intermediary through which the Advisor Class shares are purchased. The total
expense ratio of the Advisor Class is 0.25% higher than the total expense ratio
of the Investor Class.
An INSTITUTIONAL CLASS is also available to endowments, foundations,
defined-benefit pension plans or financial intermediaries serving these
investors. This class recognizes the relatively lower cost of serving
institutional customers and others who invest at least $5 million in an American
Century fund or at least $10 million in multiple funds. In recognition of the
larger investments and account balances and comparatively lower transaction
costs, the total expense ratio of the Institutional Class is 0.20% less than the
total expense ratio of the Investor Class shares.
The Institutional Class had not commenced as of October 31, 1997.
All classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
ANNUAL REPORT SHARE CLASS AND RETIREMENT ACCOUNT INFORMATION 25
NOTES
26 NOTES AMERICAN CENTURY INVESTMENTS
NOTES
ANNUAL REPORT NOTES 27
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY AND POLICIES
The American Century Group consists of moderate risk and specialty funds
including conservative equity, balanced, asset allocation, gold, natural
resources, utilities and real estate funds. In general, aside from the specialty
funds, which have unique risks, this fund group is for investors seeking core
portfolio holdings in the middle ground between aggressive stock funds and money
market and bond funds.
BALANCED seeks to provide long-term growth with less volatility than funds
that are 100% invested in growth stocks. The fund keeps about 60% of its assets
in the stocks of firms with accelerating growth rates. Under normal market
conditions, the remaining assets are held in quality intermediate-term bonds.
We attempt to keep the fund fully invested at all times, regardless of
short-term market activity. Experience has shown that market gains can occur in
unpredictable spurts and that missing even some of those opportunities may
significantly limit the potential for gain.
For the equity portfolio, the management team seeks to own companies whose
earnings and revenues are growing at accelerating rates.
For the fixed-income portfolio, "quality first" is the rule. The management
team seeks only investment-grade bonds--those rated in the top four quality
categories by nationally recognized rating organizations.
Each portfolio is managed by a team, rather than by one "star" manager. We
believe this allows us to make better, more consistent management decisions.
COMPARATIVE INDICES
The indices listed below are used in the report for fund performance
comparisons. They are not investment products available for purchase.
The BLENDED INDEX is considered the benchmark for Balanced. It combines two
widely known indices in proportion to the asset mix of the fund. Accordingly,
60% of the index is represented by the S&P 500, which reflects the 60% of the
fund's assets invested in equity securities. The remaining 40% of the index is
represented by the Lehman Intermediate Government/Corporate Index, which
reflects the 40% of the fund's assets invested in intermediate-term bonds and
other fixed-income securities.
The LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE INDEX is considered to
represent the performance of a portfolio of intermediate-term U.S. government
and corporate bonds. The index includes the Lehman Government and Corporate Bond
Indices, which are composed of U.S. government, Treasury and agency securities
with one- to 10-year maturities, as well as corporate and Yankee bonds with one-
to 10-year maturities.
The S&P 500 is a capitalization-weighted index of the stocks of 500 publicly
traded U.S. companies that are considered to be leading firms in leading
industries. Created by Standard & Poor's Corporation, the index is viewed as a
broad measure of U.S. stock market performance.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
- --------------------------------------------------------------------------------
EQUITY PORTFOLIO
Portfolio Managers Jim Stowers III
Bruce Wimberly
FIXED-INCOME PORTFOLIO
Portfolio Managers Bud Hoops
Jeff Houston
- --------------------------------------------------------------------------------
28 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
FIXED-INCOME TERMS
o CREDIT QUALITY reflects the financial strength of a debt security issuer and
the likelihood of timely payment of interest and principal.
o DURATION is a measure of the sensitivity of a fixed income portfolio to
changes in interest rates. As the duration of a portfolio increases, the impact
of a change in interest rates on the value of the portfolio also increases.
o STANDARD & POOR'S (S&P) is an independent rating company, one of the two best
known in the U.S. (the other is Moody's). The credit ratings issued by S&P and
Moody's reflect the perceived financial strength (credit quality) of debt
issuers. Debt securities rated "investment grade" (deemed to be of high enough
credit quality to be appropriate investments for banks and other institutions)
by S&P are those rated BBB or higher (the highest rating is AAA).
o WEIGHTED AVERAGE MATURITY (WAM), another measurement of the sensitivity of a
fixed-income portfolio to interest rate changes, indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and interest rate sensitivity
the portfolio has.
RETURNS
o TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
o AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as year-by-year results.
For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on pages 19 and 20.
EQUITY TERMS
o BLUE-CHIP STOCKS--generally considered to be the stocks of the most
established companies in American industry. They are generally large, fairly
stable companies that have demonstrated consistent earnings and usually have
long-term growth potential. Examples include General Electric and Coca-Cola.
o CYCLICAL STOCKS--generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
o GROWTH STOCKS--generally considered to be the stocks of companies that have
experienced above-average earnings growth and appear likely to continue such
growth. These stocks often sell at high P/E ratios. Examples can include the
stocks of high-tech, healthcare and consumer staple companies.
o LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS--generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
o MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
o PRICE/EARNINGS (P/E) RATIO--a stock value measurement calculated by dividing a
company's stock price by its earnings per share, with the result expressed as a
multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
o SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be the
stocks of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
o VALUE STOCKS--generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
ANNUAL REPORT GLOSSARY 29
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
9712 [recycled logo]
SH-BKT-10463 Recycled
<PAGE>
ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
BENHAM
GROUP
Cash Reserve
TABLE OF CONTENTS
Report Highlights ....................................................... 1
Our Message to You ...................................................... 2
Performance & Portfolio Information ..................................... 3
Management Q & A ........................................................ 4
Schedule of Investments ................................................. 6
Statement of Assets and Liabilities ..................................... 9
Statement of Operations ................................................. 10
Statements of Changes in Net Assets ..................................... 11
Notes to Financial Statements ........................................... 12
Financial Highlights .................................................... 15
Independent Auditors' Report ............................................ 16
Proxy Voting Results .................................................... 17
Share Class and Retirement
Account Information ..................................................... 19
Background Information
Investment Philosophy & Policies ............................. 20
Comparative Indices .......................................... 20
Lipper Rankings .............................................. 20
Investment Team Leaders ...................................... 20
Glossary ................................................................ 21
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
Cash Reserve
WE WELCOME YOUR COMMENTS OR QUESTIONS ABOUT THIS REPORT.
SEE THE BACK COVER FOR WAYS TO CONTACT US BY MAIL, PHONE OR E-MAIL.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* U.S. money market yields rose during the year ended October 31, 1997,
largely because of a short-term interest rate increase by the Federal
Reserve.
* The Fed raised short-term interest rates in March 1997 to head off potential
inflation and slow the rapid pace of economic growth.
* Money market yields rose sharply in March and April, especially in the weeks
surrounding the Fed's action.
* Inflation remained low after the Fed rate hike, leading to a modest decline
in money market yields between May and October.
MANAGEMENT Q&A
* According to Lipper Analytical Services, the fund outperformed the average
money market fund during the fiscal year ended October 31, 1997.
* For much of the year, the fund was positioned defensively, with an average
maturity of 35-45 days, because of our expectations for higher short-term
rates.
* By July, inflation was still in check, so we extended the fund's average
maturity to 60 days, though it drifted back to 50 days by the end of the
period.
* The fund expanded its holdings of asset-backed securities, especially
commercial paper backed by credit card receivables.
* The fund was not directly affected by the recent financial problems in Asia.
* Going forward, we expect short-term interest rates to remain stable through
early 1998, but we may see yields trend higher later in the year.
* We plan to maintain the fund's current position until we see a clear
direction for interest rates.
CASH RESERVE
INVESTOR CLASS(1)
TOTAL RETURNS: AS OF 10/31/97
6 Months 2.58%(2)
1 Year 5.04%
7-DAY CURRENT YIELD: 5.14%
(AS OF 10/31/97)
NET ASSETS: $1.2 billion
(AS OF 10/31/97)
INCEPTION DATE: 3/1/85
TICKER SYMBOL: TWCXX
(1) See Share Classes, page 19.
(2) Not annualized.
Many of the investment terms in this report are defined in the Glossary on page
21.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
During the twelve months ended October 31, 1997, Cash Reserve continued to
offer shareholders very competitive money market returns. In the following
pages, the fund's investment team provides details about the market and how your
fund was managed during the period.
During the summer, American Century held its largest proxy vote ever. As a
result, we've been able to simplify fund management, eliminate overlapping funds
and adopt a unified fee structure for all Benham funds.
To help us provide even better investment services, we are taking steps to
strengthen our corporate investment team. In July, American Century agreed to
enter into a business partnership with J.P. Morgan & Co., Inc., which will
become a significant minority shareholder of American Century Companies, Inc.
J.P. Morgan has been in business for more than 150 years, serving institutions,
governments and individuals with complex financial needs.
Within the framework of this proposed relationship, American Century will
continue to operate as an independent company. Our corporate management team
will remain the same, and the Stowers family will retain voting control of the
company. No changes in your fund's investment managers, policies or fees are
anticipated as a result of this transaction.
Another step we took was to begin to address the year 2000 problem. As
detailed in numerous news reports, many of the world's computer systems are at
risk because they cannot distinguish the year 2000 from the year 1900. A team of
computer professionals is reviewing each of American Century's systems and
programs to identify and fix those that could cause problems. Our goal is to
have all of our computer systems and programs 100% year 2000-compliant by the
end of 1998.
On a more personal note, 1998 will be a landmark year for another reason. It
marks 40 years since Jim Stowers, Jr. launched the first two Twentieth Century
funds, Growth and Select. Not many fund companies have a 40-year track record,
nor have many built a fund family such as ours that consists of nearly 70 stock,
bond, money and diversified funds to help you achieve your financial goals.
We're proud of the investment tools and services we can offer you, and we're
looking forward to adding many more distinctive products for your use in the
coming years.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
Chief Executive Officer Vice Chairman
American Century Companies, Inc. American Century Companies, Inc.
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
PERFORMANCE & PORTFOLIO INFORMATION
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS LIFE OF FUND
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS (inception 3/1/85)
<S> <C> <C> <C> <C> <C>
Cash Reserve ..................... 2.58% 5.04% 5.14% 4.18% 5.35% 5.60%
90-Day Treasury Bill Index ....... 2.53% 5.15% 5.33% 4.58% 5.52% 5.74%
Average Money
Market
Instrument Fund(2) ............... 2.46% 4.87% 5.05% 4.23% 5.43% 5.67%(3)
Fund's Ranking
Among Money Market
Instrument Funds(2) .............. -- 118 out of 302 102 out of 233 109 out of 181 71 out of 107 55 out of 87(3)
- ------------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (inception 4/1/97)
Cash Reserve ..................... 2.45% 2.83%
90-Day Treasury Bill Index ....... 2.53% 2.97%
</TABLE>
(1) RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
(2) ACCORDING TO LIPPER ANALYTICAL SERVICES.
(3) SINCE 3/31/85, THE DATE NEAREST THE FUND'S INCEPTION FOR WHICH DATA ARE
AVAILABLE.
See pages 20-21 for more information about returns, the comparative index and
Lipper fund rankings.
YIELDS AS OF OCTOBER 31, 1997 (Investor Class)
7-DAY 7-DAY
CURRENT EFFECTIVE
YIELD YIELD
Cash Reserve 5.14% 5.27%
Yields are defined in the Glossary on page 21.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Securities 87 84
Weighted Average Maturity 50 days 46 days
Expense Ratio
(for Investor Class) 0.68% 0.70%
Money market funds are neither insured nor guaranteed by the U.S. government.
Yields will fluctuate, and there can be no assurance that the fund will be able
to maintain a stable $1.00 share price.
Past performance is no guarantee of future results.
ANNUAL REPORT PERFORMANCE & PORTFOLIO INFORMATION 3
MANAGEMENT Q&A
An interview with Denise Tabacco and John Walsh, portfolio managers on the
Benham Cash Reserve fund investment team.
HOW DID THE FUND PERFORM?
It outperformed the average money market fund. For the fiscal year ended
October 31, 1997, Cash Reserve posted a total return of 5.04%, compared with the
4.87% average return of the 302 "Money Market Instrument Funds" tracked by
Lipper Analytical Services. (See the Total Returns table on the previous page
for other fund performance comparisons.)
HOW WAS THE FUND POSITIONED DURING THE FISCAL YEAR?
We positioned the fund defensively for much of the period, keeping its
average maturity around 35-45 days. This positioning was based on our
expectations for a short-term interest rate increase by the Federal Reserve. The
Fed raised rates in March, and the fund remained defensive in anticipation of
further Fed rate hikes.
But by July, it became clear that inflation was still in check and the Fed
was holding interest rates steady, so we gradually extended the fund's average
maturity to around 60 days. We maintained this position through October, though
we allowed the fund's maturity to drift closer to 50 days toward the end of the
period.
WHY IS THE FUND CURRENTLY HOLDING MORE FLOATING-RATE NOTES THAN IT DID SIX
MONTHS AGO (SEE THE CHART BELOW)?
Most of the floaters we added in recent months were issued by insurance
agencies. These securities offered attractive yields, and our credit research
staff was able to uncover issues with high credit ratings. Investing in
insurance floaters helped boost the fund's yield without extending its average
maturity.
IN THE LAST REPORT, YOU TALKED ABOUT EXPANDING THE FUND'S HOLDINGS OF
ASSET-BACKED SECURITIES. HAVE YOU ADDED ANY MORE OF THESE SECURITIES TO THE
FUND'S PORTFOLIO?
Yes. Our recent purchases focused on asset-backed commercial paper. In
particular, the fund bought part of several pools of credit card
receivables--known as Dakota certificates--from Citibank. Asset-backed
commercial paper tends to have higher yields than most ordinary commercial
paper, and much of it carries credit enhancements that ensure a high degree of
credit quality.
Our credit research team also plays an important role in our approach to
asset-backed securities. Several of our credit analysts specialize in these
securities, and we're avoiding the more complex issues that may have hidden
credit risks. We plan to stick with the most "plain-vanilla" asset-backed
securities.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 10/31/97)
Commercial Paper 68%
Floating-Rate Notes 22%
Asset-Backed Securities 6%
Certificates of Deposit 4%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 4/30/97)
Commercial Paper 74%
Floating-Rate Notes 13%
Asset-Backed Securities 5%
U.S. Government Agency
Securities 5%
Certificates of Deposit 3%
4 MANAGEMENT Q & A AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
HAS THE FUND BEEN AFFECTED BY THE RECENT FINANCIAL MELTDOWN IN ASIA?
Not directly. The currency crises in Hong Kong and Southeast Asia have led
to stock market declines around the globe. They've also made conditions worse in
Japan, where financial companies were already struggling with a weak economy and
bad real estate loans. In recent weeks, a Japanese bank and Japan's fourth-
largest brokerage firm filed for bankruptcy.
The fund has avoided securities issued or guaranteed by Japanese financial
institutions, and we've also chosen to stay away from debt in the emerging
markets of Southeast Asia. However, the problems in this region could have some
impact on the U.S. economy and interest rates going forward.
LOOKING AHEAD, WHAT'S YOUR OUTLOOK FOR MONEY MARKET RATES?
We think that money market rates will be fairly stable through early 1998.
It's been eight months since the Fed's pre-emptive interest rate hike, and we've
seen little sign of inflation since then. As a result, we think the Fed will
remain on hold through the end of 1997.
However, we could see higher money market yields later in 1998. If economic
growth remains solid and the unemployment rate continues to fall (it dipped to a
24-year low of 4.7% in October), the Fed could take out an insurance policy
against inflation by raising short-term interest rates.
In addition, wage pressures have been building as a result of sustained low
unemployment levels. Although corporations tend to pass on higher wage costs to
consumers by raising prices, many businesses have held off to keep their prices
in line with their competitors.
Productivity gains and cost savings on benefits have helped these companies
maintain profit growth. But these factors may have run their course, which could
set the stage for rising prices--and money market yields--in the coming year.
WITH THAT OUTLOOK IN MIND, HOW WILL YOU MANAGE THE FUND OVER THE NEXT SIX
MONTHS?
We plan to maintain the fund's average maturity at around 50 days until we
see a more clear direction on inflation and interest rates. For now, we'll
continue to focus on commercial paper for most of the fund's assets, but we may
look to expand the fund's holdings of floating-rate notes if a Fed rate increase
becomes more likely.
[pie charts]
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 10/31/97)
A1+ 77%
A1 21%
A2 2%
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 4/30/97)
A1+ 77%
A1 20%
A2 3%
ANNUAL REPORT MANAGEMENT Q & A 5
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------------
COMMERCIAL PAPER(1)
AEROSPACE & DEFENSE--0.4%
<S> <C> <C>
$ 4,900 Allied Signal Inc., 5.50%, 11/10/97 $ 4,893
-------------------
BANKING--13.8%
19,500 ABN Amro Bank North America
Finance, Inc., 5.55%, 12/15/97 19,368
10,000 Banco de Credito, 5.60%, 1/6/98
(LOC: Barclays Bank PLC) 9,897
30,000 Bankers Trust New York Corp.,
5.53%-5.60%, 11/24/97
through 4/16/98 29,782
9,800 Bil North America, Inc.,
5.54%-5.62%, 12/5/97
through 1/8/98 9,738
10,000 Demir Funding, 5.57%, 1/12/98
(LOC: Bayerische Vereinsbank
A.G.) 9,889
21,000 Garanti Funding Corporation,
5.53%-5.58%, 2/4/98 through
4/28/98 (LOC: Bayerische
Vereinsbank A.G.) 20,576
22,000 Generale Bank S.A.,
5.53%-5.55%, 1/23/98 21,719
22,500 IMI Funding Co. (USA),
5.55%-5.57%, 1/15/98
through 2/5/98 22,211
20,000 Westdeutsche Landesbank
Girozentrale, 5.52%, 11/12/97
through 11/24/97 19,948
-------------------
163,128
-------------------
BUILDING PRODUCTS--0.7%
9,000 Cemex, S.A. De, 5.50%, 2/23/98 8,842
-------------------
DIVERSIFIED COMPANIES--1.4%
17,000 Mitsubishi International, 5.58%,
1/6/98 16,826
-------------------
FINANCIAL SERVICES--19.8%
2,700 Cargill Inc., 5.51%, 12/8/97 2,685
12,000 Corporate Receivables Corp.,
5.50%, 12/17/97 (Acquired
10/8/97, Cost $11,872)(2) 11,915
13,000 Dakota Certificates (Citibank),
Series 1995-7,
5.67%, 11/3/97 (Acquired 8/18/97,
Cost $12,846)(2) 12,996
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------------
$10,000 Dakota Certificates (Citibank),
Series 1995-7, 5.69%,
11/10/97 (Acquired 8/14/97,
Cost $9,865)(2) $ 9,986
25,000 Dakota Certificates (Citibank),
Series 1995-7,
5.67%, 11/20/97 (Acquired 9/3/97,
Cost $24,700)(2) 24,927
11,600 Dakota Certificates (Citibank),
Series 1995-7,
5.69%, 12/10/97 (Acquired 9/10/97,
Cost $11,438)(2) 11,531
31,000 Ford Motor Credit, 5.50%-5.51%,
12/15/97 through 12/19/97 30,782
63,000 General Electric Capital Corp.,
5.53%-5.57%, 11/3/97
through 2/24/98 62,441
23,800 General Motors Acceptance Co.,
5.61%-5.69%, 11/4/97
through 12/8/97 23,722
23,200 Hitachi Credit America Corp.,
5.58%-5.60%, 11/25/97
through 1/16/98 22,996
20,000 WCP Funding, Inc., 5.60%,
1/28/98 (Acquired 10/23/97,
Cost $19,698)(2) 19,726
-------------------
233,707
-------------------
FOOD & BEVERAGE--0.9%
10,500 Campbell Soup Co., 5.50%,
1/26/98 10,362
-------------------
INSURANCE--7.3%
25,000 Anchor National Life, 5.52%,
11/20/97 24,927
45,000 General Re Corp., 5.51%-5.53%,
12/31/97 through 1/7/98 44,564
4,000 Prudential Funding, 5.57%, 1/9/98
(Acquired 9/11/97, Cost
$3,926)(2) 3,957
10,000 Prudential Funding, 5.57%,
1/12/98 (Acquired 9/11/97,
Cost $9,811)(2) 9,889
3,100 Safeco Corporation, 5.56%,
12/10/97 (Acquired 10/24/97,
Cost $3,077)(2) 3,081
-------------------
86,418
-------------------
SEE NOTES TO FINANCIAL STATEMENTS
6 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------------
METALS & MINING--1.1%
$12,900 RTZ America Inc., 5.50%,
12/12/97 $ 12,819
-------------------
OFFICE EQUIPMENT & SUPPLIES--1.5%
17,565 Hitachi America, Ltd.,
5.52%-5.60%, 11/25/97 17,500
-------------------
PETROLEUM REFINING--3.5%
26,500 Chevron Transport, 5.52%-5.55%,
11/21/97 through 2/17/98 26,160
2,500 Chevron U.K. Investment PLC,
5.50%, 12/18/97 2,482
13,100 Statoil-Den Norske Stats, 5.50%,
11/5/97 13,092
-------------------
41,734
-------------------
PHARMACEUTICALS--2.8%
19,000 Glaxo Wellcome PLC, 5.53%,
11/28/97 18,921
14,000 Warner-Lambert Co., 5.50%,
12/31/97 (Acquired 9/8/97,
Cost $13,756)(2) 13,872
-------------------
32,793
-------------------
PUBLISHING--1.1%
13,000 Reed Elsevier Inc., 5.50%,
12/2/97 (Acquired 10/6/97,
Cost $12,887)(2) 12,938
-------------------
SECURITY BROKERS & DEALERS--9.3%
5,000 Bear Stearns Co., 5.56%, 1/12/98 4,944
9,000 BT Securities Corp., 5.52%,
12/22/97 8,930
20,000 Credit Suisse First Boston, Inc.,
5.52%, 2/2/98 19,715
20,000 Goldman Sachs Group L.P., 5.52%,
11/18/97 19,948
30,000 Merrill Lynch & Co., 5.51%-5.59%,
11/6/97 through 1/12/98 29,741
27,500 Morgan Stanley Group, Inc., 5.51%,
11/3/97 through 11/13/97 27,463
-------------------
110,741
-------------------
SOVEREIGN GOVERNMENTS
& AGENCIES--4.2%
50,000 Kingdom of Sweden, 5.50%-5.55%,
12/5/97 through 3/2/98 49,471
-------------------
TOTAL COMMERCIAL PAPER--67.8% 802,172
-------------------
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------------
CERTIFICATES OF DEPOSIT
$10,000 Caisse National, 5.90%, 8/11/98 $ 10,000
20,000 Credit Agricole Indosuez, New York
Branch, 6.00%, 10/16/98
(Acquired 10/2/97, Cost
$20,000)(2) 20,000
10,000 Deutsche Bank, A.G., 5.64%,
1/16/98 9,999
5,000 National Westminster Bank, 5.86%,
3/10/98 4,999
-------------------
TOTAL CERTIFICATES OF DEPOSIT--3.8% 44,998
-------------------
OTHER CORPORATE DEBT
BANKING--6.6%
23,750 American Express Centurion Bank,
VRN, 5.62%, 11/23/97, resets
monthly off the 1-month LIBOR
minus 0.03% with no caps 23,750
14,500 First Bank Minneapolis, VRN, 5.59%,
11/19/97, resets monthly off the
1-month LIBOR
minus 0.04% with no caps 14,500
20,000 First Bank, N.A., VRN, 5.53%,
11/19/97, resets monthly off the
1-month LIBOR minus
0.09% with no caps 19,994
20,000 PNC Bank, N.A., VRN, 5.55%,
11/10/97, resets monthly off the
1-month LIBOR minus 0.08%
with no caps 19,998
-------------------
78,242
-------------------
FINANCIAL SERVICES--3.0%
25,000 Abbey National Treasury Services PLC, VRN,
5.51%, 11/17/97, resets monthly
off the 1-month
LIBOR minus 0.12% with no caps 24,990
10,000 Merrill Lynch & Co., VRN, 6.00%,
1/15/98, resets quarterly off the
3-month LIBOR plus 0.25% with
no caps 10,014
-------------------
35,004
-------------------
ANNUAL REPORT SCHEDULE OF INVESTMENTS 7
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------------
INSURANCE--12.6%
$50,000 General American Life Insurance Company, VRN,
5.86%, 11/21/97, resets
monthly off the 1-month
LIBOR plus 0.20% with no caps
(Acquired 1/3/97
through 7/7/97, Cost
$50,000)(2)(3) $ 50,000
17,000 Prudential Funding, VRN, 5.62%, 11/26/97,
resets monthly off the 1-month
LIBOR minus 0.04% with
no caps (Acquired
11/25/96, Cost $17,000)(2) 17,000
47,000 Transamerica Occidental Life Insurance
Co., VRN, 5.66%, 11/3/97, resets
monthly off the 1-month
LIBOR with no caps (Acquired 6/30/97,
Cost $47,000)(2)(3) 47,000
23,500 Travelers Insurance Company (The),
VRN, 5.71%, 11/21/97, resets
monthly off the 1-month LIBOR
plus 0.05% with no caps
(Acquired 5/23/97, Cost
$23,500)(2)(3) 23,500
11,700 Travelers Insurance Company (The),
VRN, 5.68%, 11/9/97, resets
monthly off the 1-month LIBOR
plus 0.05% with no caps
(Acquired 6/9/97, Cost
$11,700)(2)(3) 11,700
-------------------
149,200
-------------------
TOTAL OTHER CORPORATE DEBT--22.2% 262,446
-------------------
ASSET-BACKED SECURITIES
23,500 ABSIT 97-C, VRN, 5.625%, 11/17/97,
resets monthly off the 1-month
LIBOR with no caps
(Acquired 6/11/97, Cost
$23,500)(2) 23,500
12,113 Americredit Automobile
Receivables Trust, Series 1997-C,
Class A1, 5.66%, 4/6/98 12,113
8,700 Barnett Auto Trust, Series 1997-A,
Class A1, 5.65%, 4/15/98
(Acquired 9/18/97, Cost
$8,700)(2) 8,700
Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------------
$10,000 Ford Credit Auto Owner Trust,
Series 1997-B, Class A1, 5.75%,
10/15/98 $ 10,000
15,000 RACERS Series 1997-MM-8-5, VRN,
5.64%, 11/28/97,
resets monthly off the
1-month LIBOR with no
caps (Acquired 8/29/97,
Cost $15,000)(2) 15,000
2,461 Union Acceptance Corp., Series 1997-C,
Class A1, 6.21%, 2/9/98 (Acquired
9/10/97, Cost $2,461)(2) 2,461
1,540 WFS Financial Owner Trust, Series
1997-A, Class A1, 5.63%,
3/20/98 1,540
-------------------
TOTAL ASSET-BACKED SECURITIES--6.2% 73,314
-------------------
TOTAL INVESTMENT SECURITIES--100.0% $1,182,930
===================
NOTES TO SCHEDULE OF INVESTMENTS
LIBOR = LONDON INTERBANK OFFERED RATE
LOC = LETTER OF CREDIT
VRN = VARIABLE RATE NOTE. INTEREST RESET DATE IS INDICATED AND USED IN
CALCULATING THE WEIGHTED AVERAGE PORTFOLIO MATURITY. RATE SHOWN IS
EFFECTIVE OCTOBER 31, 1997.
RESETS= THE FREQUENCY WITH WHICH A FIXED-INCOME SECURITY'S COUPON CHANGES,
BASED ON CURRENT MARKET CONDITIONS OR AN UNDERLYING INDEX. THE MORE
FREQUENTLY A SECURITY RESETS, THE LESS RISK THE INVESTOR IS TAKING THAT
THE COUPON WILL VARY SIGNIFICANTLY FROM CURRENT MARKET RATES.
(1) THE RATES FOR COMMERCIAL PAPER ARE THE YIELD TO MATURITY AT PURCHASE.
(2) SECURITY WAS PURCHASED UNDER RULE 144A OR SECTION 4(2) OF THE SECURITIES
ACT OF 1933 OR IS OTHERWISE RESTRICTED AS TO RESALE AND, UNLESS REGISTERED
UNDER THE ACT OR EXEMPTED FROM REGISTRATION, MAY ONLY BE SOLD TO QUALIFIED
INSTITUTIONAL INVESTORS. THE AGGREGATE VALUE OF RESTRICTED SECURITIES AT
OCTOBER 31, 1997, WAS $353,679, WHICH REPRESENTED 30.1% OF NET ASSETS.
RESTRICTED SECURITIES WHICH WERE ILLIQUID REPRESENTED 3.3% OF NET ASSETS.
(3) FUNDING AGREEMENT.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
ASSETS ($ AND SHARES IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C>
Investment securities, at value (amortized cost and
cost for federal income tax purposes) (Note 1) ........... $ 1,182,930
Cash ....................................................... 813
Interest receivable ........................................ 1,427
-----------
1,185,170
-----------
LIABILITIES
Disbursements in excess of demand deposit cash ............. 4,056
Payable for capital shares redeemed ........................ 3,926
Accrued management fees (Note 2) ........................... 606
-----------
8,588
-----------
Net Assets ................................................. $ 1,176,582
===========
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) .................... $ 1,176,666
Accumulated undistributed net realized
loss from investment transactions ........................ (84)
-----------
$ 1,176,582
===========
Investor Class, $0.01 Par Value
Net assets ................................................. $ 1,175,975
Shares outstanding ......................................... 1,176,059
Net asset value per share .................................. $ 1.00
Advisor Class, $0.01 Par Value
Net assets ................................................. $ 607
Shares outstanding ......................................... 607
Net asset value per share .................................. $ 1.00
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT STATEMENT OF ASSETS AND LIABILITIES 9
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
INVESTMENT INCOME ($ IN THOUSANDS)
Income:
<S> <C>
Interest ................................................... $ 70,709
--------
Expenses:
Management fees (Note 2) ................................... 8,526
Distribution fees - Advisor Class .......................... 1
Shareholder service fees - Advisor Class ................... 1
Directors' fees and expenses ............................... 12
8,540
--------
Net investment income ...................................... 62,169
--------
NET REALIZED LOSS ON INVESTMENTS
Net realized loss on investments ........................... (6)
--------
Net Increase in Net Assets
Resulting from Operations ................................ $ 62,163
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
10 STATEMENT OF OPERATIONS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED OCTOBER 31, 1997
AND OCTOBER 31, 1996
Decrease in Net Assets 1997 1996
OPERATIONS ($ IN THOUSANDS)
<S> <C> <C>
Net investment income ........................ $ 62,169 $ 67,104
Net realized gain (loss) on investments ...... (6) 2
----------- -----------
Net increase in net assets
resulting from operations .................. 62,163 67,106
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Investor Class ............................. (62,154) (67,104)
Advisor Class .............................. (15) --
----------- -----------
Decrease in net assets from distributions .... (62,169) (67,104)
----------- -----------
CAPITAL SHARE TRANSACTIONS (Note 3)
Net decrease in net assets from capital
share transactions ......................... (170,512) (122,448)
----------- -----------
Net decrease in net assets ................... (170,518) (122,446)
NET ASSETS
Beginning of year ............................ 1,347,100 1,469,546
----------- -----------
End of year .................................. $ 1,176,582 $ 1,347,100
=========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT STATEMENTS OF CHANGES IN NET ASSETS 11
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham Cash Reserve Fund (the
Fund) is one of the thirteen series of funds issued by the Corporation. The
Fund's investment objective is to obtain maximum current income consistent with
the preservation of principal and maintenance of liquidity. The Fund intends to
pursue its investment objective by investing substantially all of its assets in
a portfolio of money market instruments and maintaining a weighted average
maturity of not more than 90 days. The Fund is authorized to issue two classes
of shares: the Investor Class and the Advisor Class. The two classes of shares
differ principally in their respective shareholder servicing and distribution
expenses and arrangements. All shares of the Fund represent an equal pro rata
interest in the assets of the class to which such shares belong, and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions, except for class specific expenses and exclusive rights to vote on
matters affecting only individual classes. The following significant accounting
policies, related to all classes of the Fund, are in accordance with accounting
policies generally accepted in the investment company industry.
SECURITY VALUATIONS--Securities are valued at amortized cost, which
approximates current value. When valuations are not readily available,
securities are valued at fair value as determined in accordance with procedures
adopted by the Board of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income is recorded on the accrual basis and
includes amortization of discounts and premiums. Discounts and premiums are
amortized daily on a straight-line basis.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
Fund to obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the value of the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
Fund under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the policy of the Fund to distribute all taxable
income and net capital gains to shareholders and to otherwise qualify as a
regulated investment company under provisions of the Internal Revenue Code.
Accordingly, no provision has been made for federal income taxes.
DISTRIBUTIONS--Distributions from net investment income are declared daily
and distributed monthly. The Fund does not expect to realize any long-term
capital gains, and accordingly, does not expect to pay any long-term capital
gains distributions.
At October 31, 1997, accumulated net realized capital loss carryovers of
$84,216 (expiring 2002 through 2004) may be used to offset future taxable gains.
ADDITIONAL INFORMATION--Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc. (ACIS), and the Corporation's transfer agent, American Century
Services Corporation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
12 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Fund, except brokerage commissions, taxes, interest, expenses of
those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on each classes average daily closing net assets during the previous month. The
annual management fee, effective August 1, 1997, is 0.60% and 0.35% for the
Investor Class and Advisor Class, respectively. The annual management fee prior
to August 1, 1997 was 0.70% and 0.45% for the Investor Class and Advisor Class,
respectively.
The Board of Directors has adopted a shareholder services and distribution
plan for the Advisor Class, pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Advisor Class Master Distribution and Shareholder Services Plan
provides that the Fund will pay ACIM an annual distribution fee equal to 0.25%
and service fee equal to 0.25%. The fees are computed daily and paid monthly
based on the Advisor Class's average daily closing net assets during the
previous month. The distribution fee provides compensation for distribution
expenses incurred by financial intermediaries in connection with distributing
shares of the Advisor Class including, but not limited to, payments to brokers,
dealers, and financial institutions that have entered into sales agreements with
respect to shares of the fund. The service fee provides compensation for
shareholder and administrative services rendered by ACIM, its affiliates or
independent third party providers. Fees incurred under the Master Distribution
and Shareholder Services Plan during the period April 1, 1997 (commencement of
sale of Advisor class) through October 31, 1997, were $1,606.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 13
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
3. CAPITAL SHARE TRANSACTIONS
There are 2,000,000,000 and 1,000,000,000 shares of the Investor Class and
Advisor Class authorized for issuance, respectively. Transactions in shares of
the Fund were as follows:
Shares Amount
INVESTOR CLASS (IN THOUSANDS)
Year ended October 31, 1997
Sold ......................................... 2,379,108 $ 2,379,108
Issued in reinvestment of distributions ...... 61,040 61,040
Redeemed ..................................... (2,611,267) (2,611,267)
----------- -----------
Net decrease ................................. (171,119) $ (171,119)
=========== ===========
Year ended October 31, 1996
Sold ......................................... 2,137,139 $ 2,137,139
Issued in reinvestment of distributions ...... 64,608 64,608
Redeemed ..................................... (2,324,195) (2,324,195)
----------- -----------
Net decrease ................................. (122,448) $ (122,448)
=========== ===========
ADVISOR CLASS
April 1, 1997(1) through October 31, 1997
Sold ......................................... 1,551 $ 1,551
Issued in reinvestment of distributions ...... 14 14
Redeemed ..................................... (958) (958)
----------- -----------
Net increase ................................. 607 $ 607
=========== ===========
(1) Commencement of sale of the Advisor Class.
14 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Investor
Advisor
Class Class
1997 1996 1995 1994 1993(1) 1997(2)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C>
Beginning of Period .................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
--------- --------- --------- --------- --------- ---------
Income From Investment Operations
Net Investment Income ................ 0.05 0.05 0.05 0.03 0.02 0.03
--------- --------- --------- --------- --------- ---------
Distributions
From Net Investment Income ........... (0.05) (0.05) (0.05) (0.03) (0.02) (0.03)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
========= ========= ========= ========= ========= =========
Total Return(3) ...................... 5.04% 4.99% 5.38% 3.21% 2.30% 2.83%
RATIOS/SUPPLEMENTAL RATIOS
Ratio of Expenses
to Average Net Assets .................. 0.68% 0.70% 0.70% 0.80% 1.00% 0.91%(4)
Ratio of Net Investment Income
to Average Net Assets .................. 4.93% 4.88% 5.27% 3.18% 2.30% 4.81%(4)
Net Assets End
of Period (in thousands) ..............$1,175,975 $1,347,106 $1,469,546 $1,298,982 $1,256,012 $607
</TABLE>
(1) THE DATA PRESENTED HAS BEEN RESTATED TO GIVE EFFECT TO A 100 FOR 1 STOCK
SPLIT IN THE FORM OF A STOCK DIVIDEND THAT OCCURRED ON NOVEMBER 13, 1993.
(2) APRIL 1, 1997 (COMMENCEMENT OF SALE OF THE ADVISOR CLASS) THROUGH OCTOBER
31, 1997.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS, IF ANY. TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
(4) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT FINANCIAL HIGHLIGHTS 15
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century - Benham Cash Reserve
Fund (the "Fund"), one of the funds comprising American Century Mutual Funds,
Inc. (formerly Twentieth Century Investors, Inc.), as of October 31, 1997, and
the related statements of operations and changes in net assets for the year then
ended, and the financial highlights for the year then ended. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit. The financial
statements and the financial highlights of the Fund for each of the years in the
four-year period ended October 31, 1996 were audited by other auditors whose
report, dated November 20, 1996, expressed an unqualified opinion on those
statements and financial highlights.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian, brokers and other alternate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century -
Benham Cash Reserve Fund as of October 31, 1997, the results of its operations,
the changes in its net assets, and the financial highlights for the year then
ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
December 3, 1997
16 INDEPENDENT AUDITORS' REPORT AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the ensuing
year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 725,411,828
Withheld: 13,006,081
James E. Stowers III
For: 725,506,170
Withheld: 12,911,739
Thomas A. Brown
For: 726,308,257
Withheld: 12,109,652
Robert W. Doering, M.D.
For: 725,296,111
Withheld: 13,121,798
D.D. (Del) Hock
For: 725,743,659
Withheld: 12,674,250
Linsley L. Lundgaard
For: 724,993,056
Withheld: 13,424,853
Donald H. Pratt
For: 726,189,516
Withheld: 12,228,393
Lloyd T. Silver, Jr.
For: 725,546,919
Withheld: 12,870,990
M. Jeannine Strandjord
For: 725,728,673
Withheld: 12,689,236
PROPOSAL 2:
To vote on approval of a Management Agreement with American Century
Investment Management, Inc.
INVESTOR ADVISOR
For: 717,981,074 650,484
Against: 16,620,795 0
Abstain: 3,384,652 0
Broker Non-Vote: 431,388 -
PROPOSAL 3:
To vote on the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
For: 722,888,740
Against: 12,556,129
Abstain: 2,973,040
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification
of investments.
For: 698,001,990
Against: 34,160,032
Abstain: 5,824,499
Broker Non-Vote: 431,388
* Amend the fundamental investment limitation concerning the issuance of
senior securities.
For: 697,430,754
Against: 34,713,159
Abstain: 5,842,608
Broker Non-Vote: 431,388
ANNUAL REPORT PROXY VOTING RESULTS 17
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning borrowing.
For: 694,844,763
Against: 37,286,518
Abstain: 5,855,240
Broker Non-Vote: 431,388
* Amend the fundamental investment limitation concerning lending.
For: 695,471,676
Against: 36,672,237
Abstain: 5,842,608
Broker Non-Vote: 431,388
* Amend the fundamental investment limitation concerning concentration of
investments in a particular industry.
For: 697,149,554
Against: 34,992,106
Abstain: 5,844,861
Broker Non-Vote: 431,388
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 697,500,854
Against: 34,626,548
Abstain: 5,859,119
Broker Non-Vote: 431,388
* Eliminate the fundamental limitation concerning investment in other
investment companies.
For: 698,089,288
Against: 33,992,303
Abstain: 5,904,930
Broker Non-Vote: 431,388
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 698,386,938
Against: 33,694,653
Abstain: 5,904,930
Broker Non-Vote: 431,388
* Amend the fundamental investment limitation concerning underwriting.
For: 698,256,405
Against: 33,858,840
Abstain: 5,871,276
Broker Non-Vote: 431,388
* Amend the fundamental investment limitation concerning commodities.
For: 696,183,770
Against: 35,947,419
Abstain: 5,855,332
Broker Non-Vote: 431,388
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 698,438,280
Against: 33,643,311
Abstain: 5,904,930
Broker Non-Vote: 431,388
* Eliminate the fundamental limitation concerning short sales.
For: 696,609,305
Against: 35,507,606
Abstain: 5,869,610
Broker Non-Vote: 431,388
* Eliminate the fundamental investment limitation concerning margin purchases
of securities.
For: 696,883,172
Against: 35,250,202
Abstain: 5,853,147
Broker Non-Vote: 431,388
18 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
SHARE CLASS AND RETIREMENT ACCOUNT
INFORMATION
SHARE CLASSES
Until September 3, 1996, Cash Reserve issued one class of fund shares,
reflecting the fact that most investors bought their shares directly from
American Century. All investors paid the same annual unified management fee and
did not pay any commissions or other fees to purchase shares from American
Century.
Now more share purchases are made by investors through financial
intermediaries, who are ordinarily compensated for the additional services they
provide. In September 1996, American Century began to offer two classes of
shares for Cash Reserve. One class is for investors who buy directly from
American Century, the other for investors who buy through financial
intermediaries.
The original class of Cash Reserve shares is called the INVESTOR CLASS. All
shares issued and outstanding before September 3, 1996, have been designated as
Investor Class shares. Investor Class shares may also be purchased after
September 3, 1996. Investor Class shareholders do not pay any commissions or
other fees for purchase of fund shares directly from American Century. Investors
who buy Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee.
In addition, there is an ADVISOR CLASS, which is sold through banks,
broker-dealers, insurance companies and financial advisors. Advisor Class
shares, which commenced sales on April 1, 1997, are subject to a 0.50% Rule
12b-1 service and distribution fee. Half of that fee is available to pay for
recordkeeping and administrative services, and half is available to pay for
distribution services provided by the financial intermediary through which the
Advisor Class shares are purchased. The total expense ratio of the Advisor Class
shares is 0.25% higher than the total expense ratio of the Investor Class
shares.
Both classes of shares represent a pro rata interest in the fund and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
ANNUAL REPORT SHARE CLASS AND RETIREMENT ACCOUNT INFORMATION 19
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY & POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies:
CASH RESERVE is a money market fund that seeks to provide interest income by
investing in a diversified portfolio of short-term money market securities. The
fund must maintain a weighted average maturity of 90 days or less.
An investment in Cash Reserve is neither insured nor guaranteed by the U.S.
government. Yields will fluctuate, and there can be no assurance that the fund
will be able to maintain a stable net asset value of $1 per share.
COMPARATIVE INDICES
The following index is used in the report for fund performance comparisons.
It is not an investment product available for purchase.
The 90-DAY TREASURY BILL INDEX is derived from secondary market interest
rates as published by the Federal Reserve Bank.
LIPPER RANKINGS
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking
service that groups funds according to their investment objectives. Rankings are
based on average annual returns for each fund in a given category for the
periods indicated. Rankings are not included for periods less than one year.
The Lipper category for Cash Reserve is:
MONEY MARKET INSTRUMENT FUNDS--funds that intend to maintain a stable net
asset value and that invest in high-quality financial instruments rated in the
top two grades with dollar-weighted average maturities of less than 90 days.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
- --------------------------------------------------------------------------------
Portfolio Managers Denise Tabacco, John Walsh
Credit Research Manager Greg Afiesh
- --------------------------------------------------------------------------------
20 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on page 15.
YIELDS
* 7-DAY CURRENT YIELD is calculated based on the income generated by an
investment in the fund over a seven-day period and is expressed as an annual
percentage rate.
* 7-DAY EFFECTIVE YIELD is calculated similarly, although this figure is
slightly higher than the fund's 7-Day Current Yield because of the effects of
compounding. The 7-Day Effective Yield assumes that income earned from the
fund's investments is reinvested and generating additional income.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES--the number of different securities held by a fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF MONEY MARKET SECURITIES
* ASSET-BACKED SECURITIES--debt securities that represent ownership in a pool of
receivables, such as credit card debt, auto loans or mortgages.
* CERTIFICATES OF DEPOSIT (CDS)--CDs represent a bank's obligation to repay
money deposited with it for a specified period of time. Different types of CDs
have different issuers. For example, Yankee CDs are issued by U.S. branches of
foreign banks, and Eurodollar CDs are issued in London by Canadian, European and
Japanese banks.
* COMMERCIAL PAPER (CP)--short-term debt issued by large corporations to raise
cash and to cover current expenses in anticipation of future revenues. The
maximum maturity for CP is 270 days, although most CP is issued in a one- to
50-day maturity range. CP rates generally track those of other widely traded
money market instruments, such as Treasury bills and certificates of deposit,
but they are also influenced by the maturity date and the size and credit rating
of the issuer.
* FLOATING-RATE NOTES (FLOATERS)--debt securities whose interest rates change
when a designated base rate changes. The base rate is often the federal funds
rate, the 90-day Treasury bill rate or the London Interbank Offered Rate
(LIBOR). Floaters are considered derivatives because they "derive" their
interest rates from their designated base rates. However, floaters are not
"risky" derivatives--their behavior is similar to that of their designated base
rates. The SEC has recognized this similarity and does not consider floaters to
be inappropriate investments for money market funds.
* U.S. GOVERNMENT AGENCY SECURITIES-- debt securities issued by U.S. government
agencies (such as the Federal Farm Credit Bank and the Federal Home Loan Bank).
Some agency securities are backed by the full faith and credit of the U.S.
government, while most are guaranteed only by the issuing agency. These
securities are issued with maturities ranging from three months to 30 years.
Money market funds invest in these securities when they have remaining
maturities of 13 months or less.
ANNUAL REPORT GLOSSARY 21
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
9712 [recycled logo]
SH-BKT-10498 Recycled
<PAGE>
ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
BENHAM
GROUP
Limited-Term Bond
Intermediate-Term Bond
Benham Bond
TABLE OF CONTENTS
Report Highlights ......................................................... 1
Our Message to You ........................................................ 2
Market Perspective ........................................................ 3
Corporate Credit Review ................................................... 4
Limited-Term Bond
Performance & Portfolio Information ............................ 5
Management Q & A ............................................... 6
Schedule of Investments ........................................ 9
Financial Highlights ........................................... 30
Intermediate-Term Bond
Performance & Portfolio Information ............................ 11
Management Q & A ............................................... 12
Schedule of Investments ........................................ 15
Financial Highlights ........................................... 31
Benham Bond
Performance & Portfolio Information ............................ 18
Management Q & A ............................................... 19
Schedule of Investments ........................................ 22
Financial Highlights ........................................... 32
Statements of Assets and Liabilities ...................................... 24
Statements of Operations .................................................. 25
Statements of Changes in Net Assets ....................................... 26
Notes to Financial Statements ............................................. 27
Independent Auditors' Report .............................................. 33
Proxy Voting Results ...................................................... 34
Share Class and Retirement
Account Information
Background Information
Investment Philosophy & Policies ............................... 40
Comparative Indices ............................................ 40
Lipper Rankings ................................................ 40
Investment Team Leaders ........................................ 40
Glossary .................................................................. 41
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
Limited-Term Bond
Intermediate-Term Bond
Benham Bond
WE WELCOME YOUR COMMENTS OR QUESTIONS ABOUT THIS REPORT.
SEE THE BACK COVER FOR WAYS TO CONTACT US BY MAIL, PHONE OR E-MAIL.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* U.S. fixed-income securities produced strong returns during the year ended
October 31, 1997, as yields fell substantially.
* Yields rose early in the period in response to a short-term interest rate
increase by the Federal Reserve and because of uncertainty over inflation
* Fixed-income securities benefited from a narrowing federal budget deficit,
stock market volatility and increased demand.
* Longer-maturity bonds, which typically benefit more from declining interest
rates, significantly outperformed shorter-maturity securities.
CORPORATE CREDIT REVIEW
* Corporate credit quality continued to improve during the fiscal year.
* Merger-and-acquisition activity played a prominent role in corporate credit
quality.
* The erosion of barriers set in place by the Glass-Steagall Act continued to
provide the impetus behind the merger-and-acquisition activity in the
banking industry.
* In the electric utility and telecommunications industries, deregulation
remains a key factor influencing credit quality.
LIMITED-TERM BOND
* The fund's total return outpaced the average short investment-grade debt
fund
* We kept the fund's duration around 1.7 years during the period, roughly
neutral to its peers.
* Going forward, we will likely maintain the fund's current positioning until
we feel more strongly about the strength of the U.S. economy.
INTERMEDIATE-TERM BOND
* The fund's Investor Class shares slightly underperformed the average
intermediate investment-grade debt fund.
* We kept the fund's duration within a narrow range around 4.1 years, roughly
neutral to its peers.
* Going forward, we will likely maintain the fund's current position until we
feel more strongly about the strength of the economy.
BENHAM BOND
* The fund's Investor Class shares matched the performance of the average
A-rated corporate fund.
* We maintained a steady, conservative approach to managing the fund's
duration,keeping it within a narrow range of around 5 years.
* Going forward, we will continue working closely with our research staff to
uncover attractively valued securities with the potential to enhance the
fund's return.
LIMITED-TERM BOND
TOTAL RETURNS: AS OF 10/31/97
6 Months 4.01%(1)
1 Year 6.30%
NET ASSETS: $15.3 million
(AS OF 10/31/97)
INCEPTION DATE: 3/1/94
TICKER SYMBOL: N/A
INTERMEDIATE-TERM BOND
INVESTOR CLASS(2)
TOTAL RETURNS: AS OF 10/31/97
6 Months 6.20%(1)
1 Year 7.87%
NET ASSETS: $18.1 million
(AS OF 10/31/97)
INCEPTION DATE: 3/1/94
TICKER SYMBOL: TWITX
BENHAM BOND
INVESTOR CLASS(2)
TOTAL RETURNS: AS OF 10/31/97
6 Months 7.02%(1)
1 Year 8.57%
NET ASSETS: $126.6 million
(AS OF 10/31/97)
INCEPTION DATE: 3/2/87
TICKER SYMBOL: TWLBX
(1) Not annualized.
(2) See Share Classes, page 37.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
During the twelve months ended October 31, 1997, investors in Limited-Term,
Intermediate-Term and Benham Bond funds continued to earn competitive returns as
U.S. bond prices rose overall and yields fell significantly. In the following
pages, the funds' investment team provides details about the market and how your
fund was managed during the period.
During the summer, American Century held its largest proxy vote ever. As a
result, we've been able to simplify fund management, eliminate overlapping funds
and adopt a unified fee structure for all Benham funds.
To help us provide even better investment services, we are taking steps to
bolster our corporate team. In July, American Century agreed to enter into a
business partnership with J.P. Morgan & Co., Inc., which will become a
significant minority shareholder of American Century Companies, Inc. J.P. Morgan
has been in business for more than 150 years, serving institutions, governments
and individuals with complex financial needs.
Within the framework of this proposed relationship, American Century will
continue to operate as an independent company. Our corporate management team
will remain the same, and the Stowers family will retain voting control of the
company. No changes in your fund's investment managers, policies or fees are
anticipated as a result of this transaction.
Another step we took was to begin to address the year 2000 problem. As
detailed in numerous news reports, many of the world's computer systems are at
risk because they cannot distinguish the year 2000 from the year 1900. A team of
computer professionals is reviewing each of American Century's systems and
programs to identify and fix those that could cause problems. Our goal is to
have all of our computer systems and programs 100% year-2000 compliant by the
end of 1998.
On a more personal note, 1998 will be a landmark year for another reason. It
marks 40 years since Jim Stowers, Jr. launched the first two Twentieth Century
funds, Growth and Select. Not many fund companies have a 40-year track record,
nor have many built a fund family such as ours that consists of nearly 70 stock,
bond, money market and diversified funds to help you achieve your financial
goals.
We're proud of the investment tools and services we can offer you, and we're
looking forward to adding many more distinctive products for your use in the
coming years.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
Chief Executive Officer Vice Chairman
American Century Companies, Inc. American Century Companies, Inc.
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
[line graph - data below]
TREASURY YIELD CURVES%
Years to Maturity 10/31/96 10/31/97
1 5.400% 5.340%
2 5.730% 5.600%
3 5.860% 5.680%
4 5.890% 5.740%
5 6.070% 5.710%
6 6.105% 5.775%
7 6.140% 5.840%
8 6.207% 5.837%
9 6.273% 5.833%
10 6.340% 5.830%
11 6.375% 5.867%
12 6.410% 5.904%
13 6.445% 5.941%
14 6.480% 5.978%
15 6.515% 6.015%
16 6.550% 6.052%
17 6.585% 6.089%
18 6.620% 6.126%
19 6.655% 6.163%
20 6.690% 6.200%
21 6.685% 6.195%
22 6.680% 6.190%
23 6.675% 6.185%
24 6.670% 6.180%
25 6.665% 6.175%
26 6.660% 6.170%
27 6.655% 6.165%
28 6.650% 6.160%
29 6.645% 6.155%
30 6.640% 6.150%
Source: Bloomberg Financial Markets
BONDS POST STRONG RETURNS
U.S. fixed-income securities posted strong returns during the year ended
October 31, 1997. Yields fell substantially across the maturity spectrum (see
the accompanying graph), causing the prices of Treasury and other fixed-income
securities to rise. Longer-term bonds, which typically benefit the most from
falling interest rates, outperformed shorter-term securities--the two-year
Treasury returned 7.52%, while the 30-year Treasury bond posted a return of
11.87%.
LOW INFLATION
Investor expectations for moderating economic growth and tame inflation led
to a bond rally in the final months of 1996. By early 1997, however, those
positive expectations changed dramatically. Driving that change was surprisingly
strong first-quarter economic growth. Concerned that inflation was on the verge
of accelerating, the Federal Reserve (the Fed) raised short-term interest rates
in late March. In response, investors pushed bond yields sharply higher through
mid-April amid worries that the Fed's rate hike was the first in a series.
Though the pace of economic growth moderated during the second and third
quarters of 1997, it remained at a level that has historically been accompanied
by rising prices. However, the rising prices never materialized--the consumer
price index, viewed as the broadest gauge of costs for goods and services, rose
at an annual rate of only 1.8% for the first 10 months of 1997. The unlikely
combination of steady growth and low inflation kept the Fed in heightened-
surveillance mode and led to investor uncertainty about the outlook for interest
rates.
As the trend of moderate economic growth and low inflation continued, yields
on fixed-income securities fell. With the economy growing at a non-inflationary
pace, the Fed also refrained from further interest rate increases.
SHRINKING SUPPLY, HIGHER DEMAND
Fixed-income securities also benefited from a narrowing federal budget
deficit during the period. With the deficit shrinking to its lowest level in
nearly 30 years, the Treasury continued to reduce the amount of new securities
issued to finance government debt.
Stock-market volatility was another factor supporting bond prices late in
the period. Investors turned to bonds as a safe haven from equity-market
volatility. High "real" interest rates (nominal interest rates minus inflation)
also made fixed-income securities more attractive. In addition, U.S. interest
rates were generally higher than foreign rates, which sparked increased demand
for U.S. bonds from overseas investors.
LONG-TERM TREASURYS WERE BEST
Stock-market volatility in October dampened the performance of corporate
securities, which were otherwise the best-performing fixed-income sector during
the period. Due to October's setback, however, corporate bond returns dipped
slightly below the returns of Treasury bonds in the 10- to 30-year maturity
range. Nevertheless, corporates continued to benefit from a vibrant national
economy and outpaced the returns of other fixed-income sectors. Mortgage-backed
security returns were also strong during the period, producing higher returns
than shorter-term Treasury and government agency securities.
ANNUAL REPORT MARKET PERSPECTIVE 3
CORPORATE CREDIT REVIEW
[line graph - data below]
IMPROVING CORPORATE CREDIT QUALITY
Number of Rating Changes
Downgrades Upgrades
'87 189 102
'88 237 138
'89 339 138
'90 433 98
'91 350 119
'92 227 136
'93 154 163
'94 160 183
'95 221 205
'96 184 283
Source: Moody's Investors Service
CONTINUED IMPROVEMENTS
Corporate credit quality continued to improve during the year ended October
31, 1997. Historically low unemployment levels coupled with steady job growth
helped fuel the nation's seventh consecutive year of economic expansion. With
that growth came steady corporate profits, which contributed to a record number
of corporate credit rating upgrades.
Airlines, basic materials and energy, as well as the financial services
industry, were some of the areas benefiting the most from the improving economy.
Increased efficiencies, lower debt levels and the sale of underperforming assets
were all reasons leading to credit improvements in these industries. The
uncommonly robust market environment and low inflation levels boosted the
profits of financial service providers.
CONSOLIDATION
Merger-and-acquisition activity played a prominent role in the credit
quality of companies in industries like banking, defense and telecommunications
during the year. On the positive side, mergers and acquisitions can improve cash
flows and generate greater long-term efficiencies. On the negative side, they
may result in more highly leveraged companies.
The erosion of barriers set in place by the Glass-Steagall Act continued to
provide the impetus behind the merger-and-acquisition activity in the banking
industry. This act restrains the amount of revenue U.S. banks can derive from
capital market activities. Although there has been much debate over the
antiquity of this act, Congress has been slow to change it. Bank regulators,
however, have been active in their efforts to soften the regulations the act has
created. Such steps have made it possible for U.S. banks to better compete with
other world banks, many of which do not face such limitations.
DEREGULATION
In the electric utility and telecommunications industries, deregulation
remains a key factor influencing credit quality. The newly competitive
environment is forcing utilities to become more efficient to survive as changes
occur at the state level. High-cost electricity states such as California,
Illinois and Massachusetts have been the most aggressive in legislating changes
for competition in the electric utilities industry. Contrary to original
expectations, though, the legislation passed has been mostly favorable for
electric utilities and consequently for creditors and investors in this sector.
Telecommunications companies are also going through a new wave of competition
after passage of the Telecommunications Reform Act in 1996.
TEAM APPROACH
To stay abreast of these and other developing trends, we use a team approach
to analyze corporate credit. We emphasize team analysis by professionals with
experience in industries to which we have exposure. Our analytical team members
focus on specific industries to greater utilize their individual expertise and
add value to our funds.
4 CORPORATE CREDIT REVIEW AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
LIMITED-TERM BOND
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS LIFE OF
FUND(1)
- -----------------------------------------------------------------------------------------------------
TOTAL RETURNS AS OF
OCTOBER 31, 1997(2)
<S> <C> <C> <C> <C>
Limited-Term Bond .................. 4.01% 6.30% 6.88% 5.57%
Merrill Lynch 1- to 5-Year
Govt./Corp. Index .................. 4.75% 6.93% 7.75% 6.34%
Average Short Investment-Grade
Debt Fund(3) ....................... 3.86% 6.12% 6.61% 5.86%(4)
Fund's Ranking Among
Short Investment-Grade
Debt Funds(3) ...................... -- 32 out of 100 24 out of 75 26 out of 63(4)
- ----------
(1) INCEPTION DATE WAS MARCH 1, 1994.
(2) RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
(3) ACCORDING TO LIPPER ANALYTICAL SERVICES.
(4) SINCE 3/31/94, THE DATE NEAREST THE FUND'S INCEPTION FOR WHICH DATA ARE
AVAILABLE.
</TABLE>
See pages 40-41 for more information about returns, the comparative index and
Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
$10,000 investment made 3/1/94
Value on 10/31/97
Merrill Lynch
Limited-Term 1- to 5-Year
Bond Govt./Corp.
Mar-94 $10,000 $10,000
Mar-94 $9,933 $9,937
Apr-94 $9,888 $9,879
May-94 $9,887 $9,893
Jun-94 $9,907 $9,913
Jul-94 $9,999 $10,019
Aug-94 $10,030 $10,055
Sep-94 $9,990 $10,002
Oct-94 $9,992 $10,016
Nov-94 $9,953 $9,964
Dec-94 $9,980 $9,989
Jan-95 $10,102 $10,142
Feb-95 $10,230 $10,315
Mar-95 $10,291 $10,377
Apr-95 $10,393 $10,484
May-95 $10,582 $10,729
Jun-95 $10,621 $10,794
Jul-95 $10,650 $10,822
Aug-95 $10,722 $10,896
Sep-95 $10,795 $10,959
Oct-95 $10,881 $11,066
Nov-95 $10,986 $11,184
Dec-95 $11,072 $11,284
Jan-96 $11,169 $11,385
Feb-96 $11,108 $11,307
Mar-96 $11,095 $11,274
Apr-96 $11,089 $11,263
May-96 $11,119 $11,270
Jun-96 $11,194 $11,368
Jul-96 $11,236 $11,408
Aug-96 $11,256 $11,436
Sep-96 $11,365 $11,561
Oct-96 $11,477 $11,721
Nov-96 $11,577 $11,836
Dec-96 $11,562 $11,805
Jan-97 $11,616 $11,858
Feb-97 $11,644 $11,879
Mar-97 $11,640 $11,850
Apr-97 $11,730 $11,964
May-97 $11,810 $12,051
Jun-97 $11,888 $12,146
Jul-97 $12,029 $12,324
Aug-97 $12,026 $12,307
Sep-97 $12,118 $12,421
Oct-97 $12,201 $12,533
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing the fund's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the index's
total return line does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Securities 43 29
Weighted Average Maturity 3.2 years 2.1 years
Average Duration 1.7 years 1.7 years
Expense Ratio 0.69% 0.68%
YIELD AS OF OCTOBER 31, 1997
30-DAY
SEC
YIELD
Limited-Term Bond 5.45%
30-Day SEC Yield is defined in the Glossary on page 41.
Many of the investment terms in this report are defined in the Glossary on page
41.
ANNUAL REPORT LIMITED-TERM BOND 5
LIMITED-TERM BOND
MANAGEMENT Q & A
An interview with Jeff Houston and Bud Hoops, portfolio managers on the
Limited-Term Bond fund investment team.
HOW DID THE FUND PERFORM?
For the fiscal year ended October 31, 1997, the fund's total return was
6.30%, compared with the 6.12% average return of the 100 "Short Investment-Grade
Debt Funds" tracked by Lipper Analytical Services. The fund's benchmark, the
Merrill Lynch 1- to 5-Year Government/Corporate Index, returned 6.93% for the
period, thanks mainly to its longer duration compared with the fund. In
addition, the fund is subject to operating expenses (such as transaction costs
and management fees), while the benchmark is not. (See the Total Returns table
on the previous page for other fund performance comparisons.)
HOW DID YOU MANAGE THE FUND'S DURATION DURING THE FISCAL YEAR?
Due to interest rate uncertainty during much of the period, we kept the
fund's duration within a narrow range around 1.7 years--roughly neutral compared
with its peers. This position helped insulate the fund's returns from interim
market volatility.
Rather than looking to add incremental return through aggressive duration
management, we tried to add value by searching for what we believed were
undervalued securities with the potential to appreciate.
[bar chart - data below]
LIMITED TERM BOND'S ONE-YEAR RETURNS SINCE INCEPTION
(Periods ended October 31)
Merrill Lynch
Limited-Term 1- to 5-Year
Bond Govt./Corp. Index
10/94* -0.08% 0.16%
10/95 8.89% 10.48%
10/96 5.48% 5.92%
10/97 6.30% 6.93%
This graph illustrates the fund's returns since its inception and compares them
with the index's returns. The fund's total returns include operating expenses,
while the index's do not. See page 40 for a definition of the index.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
* Return from the fund's 3/1/94 inception date to 10/31/94.
6 LIMITED-TERM BOND AMERICAN CENTURY INVESTMENTS
LIMITED-TERM BOND
HOW DID THE CORPORATE CREDIT RESEARCH TEAM HELP LOCATE THESE UNDERVALUED
SECURITIES?
Our strong credit research staff continued to make many accurate assessments
of specific credit situations. The credit team's diligent efforts led to the
purchase of many undervalued securities that subsequently appreciated in value.
To strengthen our ability to locate such securities, we bolstered our credit
staff during the fiscal year, adding three new members to the team, including an
asset-backed securities specialist. We feel our strong research staff gives the
fund a competitive advantage, allowing us to find attractive issues that other
funds lacking such resources might have passed by.
WHY DID CORPORATE SECURITIES PERFORM SO WELL DURING THE PERIOD?
These securities continued to benefit from a vibrant national economy, which
has helped strengthen U.S. businesses and boost corporate profits. Corporate
bonds typically offer higher yields than many other fixed-income securities as
compensation for their greater credit risk. However, improving corporate balance
sheets have led to lower yields for corporate debt and stronger demand from
investors. The rapid pace of stock-financed corporate mergers and acquisitions
also improved corporate credit by encouraging economies of scale and eliminating
inefficiencies. Heavy demand from mutual fund managers and foreign buyers also
helped increase prices and lower yields on corporate bonds.
As a result, the yield spread, or interest rate difference, between
comparable-maturity corporate and Treasury securities continued to decrease as
investors reached for the higher yields of corporate bonds. This continued
compression made finding attractively valued securities in this sector more
difficult.
WHAT ARE SOME OF THE POSITIVE FACTORS THAT COULD COME INTO PLAY FOR FIXED-INCOME
SECURITIES OVER THE NEXT SIX MONTHS?
Several fairly recent developments could continue to work in the bond
market's favor going forward. One of those would be continued benign inflation
levels. Another factor would be further improvements in reducing the federal
budget deficit. As the Treasury continues to issue fewer securities, the value
of existing bonds increase.
Stock-market volatility could also play a role in boosting returns for
asset-backed, government agency, Treasury and other fixed-income securities. If
stocks remain volatile, more investors could seek fixed-income securities as a
safer investment alternative. Corporate fixed-income securities, however, would
likely receive little benefit from such volatility.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 10/31/97)
Corporate Bonds 40%
U.S. Treasury Securities 35%
Asset-Backed Securities 17%
Mortgage-Backed Securities 4%
Cash 1%
Other 3%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 4/30/97)
U.S. Treasury Securities 33%
Corporate Bonds 33%
Asset-Backed Securities 13%
Cash 13%
Mortgage-Backed Securities 6%
U.S. Government Agency
Securities 2%
ANNUAL REPORT LIMITED-TERM BOND 7
LIMITED-TERM BOND
DO YOU HAVE ANY CONCERNS ABOUT THE MARKET GOING FORWARD?
Yes, we have a few. The U.S. economic expansion is now in its seventh year,
very old from a historical perspective. Generally, rising prices and other
cyclical pressures tend to appear this far into an expansionary phase. We
believe the historical threat of such pressures is part of the reason why the
Federal Reserve remains concerned about the prospects for inflation, and we
share this concern.
WHAT MIGHT CAUSE THIS CONCERN TO BECOME REALITY?
Further signs that wage pressures are causing inflation to accelerate could
certainly do the trick. If wages continue to rise it could be a harbinger for
higher interest rates. Such pressures could force the Federal Reserve to raise
short-term interest rates in order to keep inflation within manageable levels.
Wages and other employment costs are an important consideration for
inflation because they account for nearly two-thirds of total business costs.
Although savings on health care and benefits and improvements in worker
productivity have offset wage increases, these savings may have run their
course.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD?
We plan to maintain the fund's neutral duration and average maturity
positions until we see a clearer direction for the U.S. economy and inflation.
We will also continue working closely with our research staff to uncover
attractively valued securities with the potential to enhance the fund's return.
[pie charts]
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 10/31/97)
AAA 57%
AA 1%
A 17%
BBB 25%
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 4/30/97)
AAA 67%
A 13%
BBB 20%
8 LIMITED-TERM BOND AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
LIMITED-TERM BOND
OCTOBER 31, 1997
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
<S> <C> <C>
$2,000 U.S. Treasury Notes, 6.125%,
5/15/98 $ 2,007
600 U.S. Treasury Notes, 6.00%,
9/30/98 603
300 U.S. Treasury Notes, 5.625%,
11/30/98 300
500 U.S. Treasury Notes, 5.875%,
1/31/99 501
100 U.S. Treasury Notes, 5.00%,
2/15/99 99
400 U.S. Treasury Notes, 5.875%,
8/31/99 402
500 U.S. Treasury Notes, 6.375%,
5/15/00 508
250 U.S. Treasury Notes, 6.50%,
5/31/02 257
100 U.S. Treasury Notes, 6.25%,
6/30/02 102
400 U.S. Treasury Notes, 6.25%,
8/31/02 408
-----------------
TOTAL U.S. TREASURY SECURITIES--34.9% 5,187
-----------------
(Cost $5,155)
MORTGAGE-BACKED SECURITIES(1)
493 FNMA Pool #378698, 8.00%,
5/1/12 512
120 FNMA REMIC, Series 1991-21,
Class G PAC, 6.00%, 12/25/19 119
-----------------
TOTAL MORTGAGE-BACKED SECURITIES-4.2% 631
-----------------
(Cost $627)
ASSET-BACKED SECURITIES(1)
200 First Merchants Auto Receivables
Corp., Series 1996-B, Class A2,
6.80%, 5/15/01 204
250 FNMA Whole Loan, Series
1995-W1, Class A6, 8.10%,
4/25/25 259
500 Green Tree Financial Corporation,
Series 1995-7, Class A3, 6.35%,
11/15/26 504
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
$ 200 NationsBank Auto Owner Trust,
Series 1996-A, Class B1, 6.75%,
6/15/01 $ 204
500 Textron, Series 1997-A, Class A,
6.05%, 3/16/09 501
200 The Money Store Home Equity
Trust, Series 1996-D, Class A3,
6.295%, 11/15/11 201
200 United Companies Financial Corp.,
Home Equity Loan, Series
1996-B1, Class A2, 7.075%,
4/15/10 202
150 United Companies Financial Corp.,
Home Equity Loan, Series
1996-D1, Class A4, 6.776%,
2/15/16 152
300 World Omni Automobile Lease
Securitization, Series 1996-B,
Class A2, 6.20%, 11/15/02 302
-----------------
TOTAL ASSET-BACKED SECURITIES--17.0% 2,529
-----------------
(Cost $2,504)
CORPORATE BONDS
BANKING--4.1%
200 Capital One Bank, 6.74%,
5/31/99 201
200 Golden West Financial Corp.,
9.15%, 5/23/98 204
200 MBNA Corp., 6.875%, 10/1/99 203
-----------------
608
-----------------
COMMUNICATIONS SERVICES--3.8%
500 TKR Cable Inc., 10.50%, 10/30/07 558
-----------------
FINANCIAL SERVICES--22.8%
300 Advanta Corp., MTN, 7.00%,
5/1/01 300
500 Caterpillar Financial Services,
MTN, 6.49%, 10/15/99 504
300 CIT Group Holdings, MTN, 6.625%,
9/13/99 303
350 Comdisco, Inc., 7.75%, 9/1/99 361
200 Ford Motor Credit Co., 7.75%,
10/1/99 207
200 Franchise Finance Corp., 7.00%,
11/30/00 204
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT LIMITED-TERM BOND 9
SCHEDULE OF INVESTMENTS
LIMITED-TERM BOND
OCTOBER 31, 1997
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
$ 250 General Motors Acceptance Corp.,
MTN, 7.30%, 2/2/98 $ 251
300 International Lease Finance Corp.,
6.375%, 1/18/00 302
250 Lehman Brothers Holdings, Inc.,
6.625%, 11/15/00 252
200 Paine Webber Group Inc., MTN,
7.96%, 4/28/00 208
500 Salomon Inc., 6.65%, 7/15/01 507
-----------------
3,399
-----------------
REAL ESTATE--4.1%
300 Price REIT, Inc. (The), 7.25%,
11/1/00 307
300 Speiker Properties Inc., 6.80%,
12/15/01 306
-----------------
613
-----------------
RETAIL (GENERAL MERCHANDISE)--0.7%
100 Dayton Hudson Co., 9.25%,
3/1/01 109
-----------------
TOBACCO--3.4%
500 Philip Morris Companies, Inc.,
7.75%, 5/1/99 512
-----------------
UTILITIES--1.4%
200 Cincinnati Gas & Electric Co.,
5.80%, 2/15/99 200
-----------------
TOTAL CORPORATE BONDS--40.3% 5,999
-----------------
(Cost $5,925)
OTHER CORPORATE DEBT--3.1%
500 MBNA Global Capital Securities,
VRN, 6.52%, 11/3/97, resets
quarterly off the 3-month LIBOR
plus 0.80% with no caps,
final maturity 2/1/27 458
-----------------
(Cost $465)
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS--0.5%
Repurchase Agreement, Goldman Sachs & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 10/31/97,
due 11/3/97 (Delivery value $81) $ 81
-----------------
(Cost $81)
TOTAL INVESTMENT SECURITIES-- 100.0% $14,885
=================
(Cost $14,757)
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
FNMA = FEDERAL NATIONAL MORTGAGE ASSOCIATION
LIBOR = LONDON INTERBANK OFFERED RATE
MTN = MEDIUM TERM NOTE
VRN = VARIABLE RATE NOTE. INTEREST RESET DATE IS INDICATED. RATE INDICATED IS
EFFECTIVE OCTOBER 31, 1997.
RESETS= THE FREQUENCY WITH WHICH A FIXED-INCOME SECURITY'S COUPON CHANGES,
BASED ON CURRENT MARKET CONDITIONS OR AN UNDERLYING INDEX. THE MORE
FREQUENTLY A SECURITY RESETS, THE LESS RISK THE INVESTOR IS TAKING THAT
THE COUPON WILL VARY SIGNIFICANTLY FROM CURRENT MARKET RATES.
(1) FINAL MATURITY INDICATED. EXPECTED REMAINING MATURITY USED FOR PURPOSES OF
CALCULATING THE WEIGHTED AVERAGE PORTFOLIO MATURITY.
SEE NOTES TO FINANCIAL STATEMENTS
10 LIMITED-TERM BOND AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
INTERMEDIATE-TERM BOND
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS LIFE OF FUND
- --------------------------------------------------------------------------------------------------------------
INVESTOR CLASS (inception 3/1/94)
<S> <C> <C> <C> <C>
Intermediate-Term Bond ..................... 6.20% 7.87% 8.44% 6.49%
Lehman Intermediate Govt./Corp. Index ...... 5.66% 7.49% 8.58% 6.54%
Average Intermediate Investment-Grade
Debt Fund(2) ............................... 6.38% 7.98% 8.95% 7.22%(3)
Fund's Ranking Among Intermediate
Investment-Grade Debt Funds(2) ............. -- 103 out of 195 94 out of 139 58 out of 115(3)
- --------------------------------------------------------------------------------------------------------------
ADVISOR CLASS (inception 8/14/97)
Intermediate-Term Bond ................................................................... 2.33%
Lehman Intermediate Govt./Corp. Index .................................................... 2.28%(4)
(1) RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
(2) ACCORDING TO LIPPER ANALYTICAL SERVICES.
(3) SINCE 3/31/94, THE DATE NEAREST THE CLASS' INCEPTION FOR WHICH DATA ARE
AVAILABLE.
(4) SINCE 8/31/97, THE DATE NEAREST THE CLASS' INCEPTION FOR WHICH DATA ARE
AVAILABLE.
</TABLE>
See pages 40-41 for more information about returns, the comparative index and
Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER LIFE OF FUND (Investor Class) $10,000 investment made
3/1/94
Value as of 10/31/97
Intermediate-Term Lehman Intermediate
Bond Govt./Corp. Index
Mar-94 $10,000 $10,000
Mar-94 $9,856 $9,835
Apr-94 $9,784 $9,768
May-94 $9,798 $9,775
Jun-94 $9,800 $9,776
Jul-94 $9,926 $9,917
Aug-94 $9,950 $9,947
Sep-94 $9,881 $9,856
Oct-94 $9,876 $9,855
Nov-94 $9,840 $9,811
Dec-94 $9,879 $9,845
Jan-95 $10,014 $10,011
Feb-95 $10,200 $10,219
Mar-95 $10,264 $10,277
Apr-95 $10,369 $10,403
May-95 $10,701 $10,717
Jun-95 $10,753 $10,789
Jul-95 $10,743 $10,790
Aug-95 $10,863 $10,888
Sep-95 $10,949 $10,967
Oct-95 $11,080 $11,089
Nov-95 $11,232 $11,234
Dec-95 $11,372 $11,352
Jan-96 $11,472 $11,449
Feb-96 $11,286 $11,315
Mar-96 $11,215 $11,258
Apr-96 $11,154 $11,218
May-96 $11,129 $11,209
Jun-96 $11,253 $11,328
Jul-96 $11,277 $11,362
Aug-96 $11,264 $11,371
Sep-96 $11,448 $11,529
Oct-96 $11,674 $11,733
Nov-96 $11,861 $11,888
Dec-96 $11,743 $11,812
Jan-97 $11,802 $11,858
Feb-97 $11,833 $11,881
Mar-97 $11,713 $11,799
Apr-97 $11,857 $11,937
May-97 $11,955 $12,036
Jun-97 $12,088 $12,145
Jul-97 $12,407 $12,392
Aug-97 $12,296 $12,330
Sep-97 $12,468 $12,473
Oct-97 $12,592 $12,615
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing the fund's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the index's
total return line does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Securities 58 49
Weighted Average Maturity 6.7 years 6.4 years
Average Duration 4.1 years 4.0 years
Expense Ratio (Investor Class) 0.75% 0.74%
YIELD AS OF OCTOBER 31, 1997
30-DAY
SEC
YIELD
Investor Class 5.79%
Advisor Class 5.54%
30-Day SEC Yield is defined in the Glossary on page 41.
Many of the investment terms in this report are defined in the Glossary on page
41.
ANNUAL REPORT INTERMEDIATE-TERM BOND 11
INTERMEDIATE-TERM BOND
MANAGEMENT Q & A
An interview with Jeff Houston and Bud Hoops, portfolio managers on the
Intermediate-Term Bond fund investment team.
HOW DID THE FUND PERFORM?
For the fiscal year ended October 31, 1997, the fund's Investor Class shares
returned 7.87%, compared with the 7.98% average return of the 195 "Intermediate
Investment-Grade Debt Funds" tracked by Lipper Analytical Services. The fund's
returns surpassed its benchmark, the Lehman Intermediate Government/ Corporate
Index, which returned 7.49% for the period. (See the Total Returns table on the
previous page for other fund performance comparisons.)
HOW DID YOU MANAGE THE FUND'S DURATION DURING THE FISCAL YEAR?
We kept the fund's duration within a narrow range around 4.1 years during
the period, roughly neutral to its Lipper peer group. We chose this positioning
because of interest rate uncertainty.
WAS THIS NEUTRAL POSITIONING THE MAIN REASON WHY THE FUND'S PERFORMANCE WAS IN
LINE WITH ITS PEERS?
Yes. We tend to avoid making interest rate bets that can cause unwanted
volatility in the fund's returns. Rather than looking to add incremental return
through aggressive duration management, we try to add value to the fund's
returns in other ways.
[bar chart - data below]
INTERMEDIATE-TERM BOND'S ONE-YEAR RETURNS SINCE INCEPTION(1)
(Periods ended October 31)
Intermediate-Term Lehman Intermediate
Bond Govt./Corp. Index
10/94(2) -1.24% -1.45%
10/95 12.19% 12.54%
10/96 5.36% 5.81%
10/97 7.87% 7.49%
This graph illustrates the fund's returns since its inception and compares them
with the index's returns. The fund's total returns include operating expenses,
while the index's do not. See page 40 for a definition of the index.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
(1) Investor Class.
(2) Return from the fund's 3/1/94 inception date to 10/31/94.
12 INTERMEDIATE-TERM BOND AMERICAN CENTURY INVESTMENTS
INTERMEDIATE-TERM BOND
One method is to keep the majority of the fund's assets in higher-yielding
securities, such as corporate debt, asset- and mortgage-backed securities. We
tend to look for these types of securities when bond yields are relatively
stable because interest payments usually comprise more of a bond's return in
such environments.
Another is to actively search for what we believe are undervalued securities
with the potential to appreciate.
HOW DID THE CORPORATE CREDIT RESEARCH TEAM HELP LOCATE THESE UNDERVALUED
SECURITIES?
We work closely with our credit research team, which continued to make many
accurate assessments of specific credit situations. The team's diligent efforts
led to the purchase of many undervalued securities that subsequently
appreciatedin value.
To strengthen our ability to locate such securities, we bolstered our credit
staff during the fiscal year, adding three new members to the team, including an
asset-backed securities specialist. We feel our strong research staff gives the
fund a competitive advantage, allowing us to find attractive issues that other
funds lacking such resources might have passed by.
WHY DID CORPORATE SECURITIES PERFORM SO WELL DURING THE PERIOD?
These securities continued to benefit from a vibrant national economy, which
has helped strengthen U.S. businesses and boost corporate profits. Corporate
bonds typically offer higher yields than many other fixed-income securities as
compensation for their greater credit risk. However, improving corporate balance
sheets have led to lower yields for corporate debt and stronger demand from
investors. The rapid pace of stock-financed corporate mergers and acquisitions
also improved corporate credit by encouraging economies of scale and eliminating
inefficiencies. Heavy demand from mutual fund managers and foreign buyers also
helped increase prices and lower yields on corporate bonds.
As a result, the yield spread, or interest rate difference, between
comparable-maturity corporate and Treasury securities continued to decrease as
investors reached for the higher yields of corporate bonds. This continued
compression made finding attractively valued securities in this sector more
difficult.
WHAT ARE SOME OF THE POSITIVE FACTORS THAT COULD COME INTO PLAY FOR FIXED-INCOME
SECURITIES OVER THE NEXT SIX MONTHS?
Several fairly recent developments could continue to work in the bond
market's favor going forward. One of those would be continued benign inflation
levels. Another factor would be further improvements in reducing the federal
budget deficit. As the Treasury continues to issue fewer securities, the value
of existing bonds increase.
Stock market volatility could also play a role in boosting returns for
asset-backed, government agency, Treasury and other fixed-income securities.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 10/31/97)
Corporate Bonds 55%
U.S. Treasury Securities 17%
Asset-Backed Securities 9%
Mortgage-Backed Securities 7%
Foreign Corporate Bonds 4%
Other 8%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 4/30/97)
Corporate Bonds 55%
U.S. Treasury Securities 20%
Mortgage-Backed Securities 9%
Asset-Backed Securities 7%
Cash 6%
Foreign Governments &
Agencies 3%
ANNUAL REPORT INTERMEDIATE-TERM BOND 13
INTERMEDIATE-TERM BOND
If stocks remain volatile, more investors could seek fixed-income securities
as a safer investment alternative. Corporate fixed-income securities, however,
would likely receive little benefit from such volatility.
DO YOU HAVE ANY CONCERNS ABOUT THE MARKET GOING FORWARD?
Yes, we have a few. The U.S. economic expansion is now in its seventh year,
very old from a historical perspective. Generally, rising prices and other
cyclical pressures tend to appear this far into an expansionary phase. We
believe the historical threat of such pressures is part of the reason why the
Federal Reserve remains concerned about the prospects for inflation, and we
share this concern.
WHAT MIGHT CAUSE THIS CONCERN TO BECOME REALITY?
Further signs that wage pressures are causing inflation to accelerate could
certainly do the trick. If wages continue to rise, it could be a harbinger for
higher interest rates. That's because such pressures could force the Federal
Reserve to raise short-term interest rates in order to keep inflation within
manageable levels.
Wages and other employment costs are an important consideration for
inflation because they account for nearly two-thirds of total business costs.
Although savings on health care and benefits and improvements in worker
productivity have offset wage increases, these savings may have run their
course.
ARE THERE ANY OTHER MAJOR TRENDS YOU'RE MONITORING?
We continue to watch developments in Asia with a careful eye. Banking
problems in Japan and South Korea merit close scrutiny because of the
potentially negative repercussions of such problems on U.S. corporations with
large overseas investments.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD?
We plan to maintain the fund's neutral posture for now, keeping the fund
conservatively positioned until we see a clearer direction for the U.S. economy
and inflation.
[pie charts]
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 10/31/97)
AAA 45%
AA 4%
A 30%
BBB 21%
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 4/30/97)
AAA 42%
AA 6%
A 32%
BBB 20%
14 INTERMEDIATE-TERM BOND AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
INTERMEDIATE-TERM BOND
OCTOBER 31, 1997
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
U. S. TREASURY SECURITIES
<S> <C> <C>
$1,050 U. S. Treasury Notes, 6.00%,
9/30/98 $ 1,055
600 U. S. Treasury Notes, 5.875%,
8/31/99 602
100 U. S. Treasury Notes, 7.75%,
2/15/01 106
300 U. S. Treasury Notes, 6.50%,
5/31/02 309
600 U. S. Treasury Notes, 7.25%,
5/15/04 646
500 U. S. Treasury Notes, 5.875%,
11/15/05 499
225 U. S. Treasury Bonds, 7.625%,
2/15/25 266
-----------------
TOTAL U.S. TREASURY SECURITIES--17.3% 3,483
-----------------
(Cost $3,409)
U.S. GOVERNMENT AGENCY SECURITIES-1.8%
350 FNMA, 7.49%, 5/22/07 362
-----------------
(Cost $352)
MORTGAGE-BACKED SECURITIES(1)
679 FHLMC Pool #E00279, 6.50%,
2/1/09 681
273 FNMA Pool #250627, 8.00%,
7/1/26 284
471 GNMA Pool #002202, 7.00%,
4/20/26 472
-----------------
TOTAL MORTGAGE-BACKED SECURITIES--7.1% 1,437
-----------------
(Cost $1,406)
ASSET-BACKED SECURITIES(1)
300 First Merchants Auto Receivables
Corp., Series 96B, Class A2,
6.80%, 5/15/01 306
300 NationsBank Auto Owner Trust,
Series 1996-A, Class B1,
6.75%, 6/15/01 306
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
$ 300 United Companies Financial Corp.,
Home Equity Loan, Series
1996-B1, Class A2, 7.075%,
4/15/10 $ 303
250 United Companies Financial Corp.,
Home Equity Loan, Series
1996-D1, Class A4, 6.78%,
2/15/16 254
400 United Companies Financial Corp.,
Home Equity Loan, Series
1996-D1, Class A5, 6.92%,
10/15/18 408
300 United Companies Financial Corp.,
Home Equity Loan, Series
1997-C, Class A7, 6.85%,
1/15/29 304
-----------------
TOTAL ASSET-BACKED SECURITIES--9.3% 1,881
-----------------
(Cost $1,849)
CORPORATE BONDS
AUTOMOBILES & AUTO PARTS--1.6%
300 General Motors Corp. Global Notes,
9.625%, 12/1/00 329
-----------------
BANKING--8.6%
300 ABN Amro Bank NV (Chicago),
7.125%, 6/18/07 312
500 BankAmerica Corp., 7.75%,
7/15/02 529
300 Capital One Bank, 5.95%,
2/15/01 296
250 Corestates Capital Corp., 5.875%,
10/15/03 243
350 Santander Financial Issuances, Ltd.,
7.00%, 4/1/06 360
-----------------
1,740
-----------------
COMMUNICATIONS EQUIPMENT--1.6%
300 Anixter International Inc., 8.00%,
9/15/03 317
-----------------
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT INTERMEDIATE-TERM BOND 15
SCHEDULE OF INVESTMENTS
INTERMEDIATE-TERM BOND
OCTOBER 31, 1997
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
COMMUNICATIONS SERVICES--2.9%
$ 250 TKR Cable, Inc., 10.50%,
10/30/07 $ 279
300 Worldcom Inc., 7.55%, 4/1/04 314
-----------------
593
-----------------
DIVERSIFIED COMPANIES--1.5%
300 Hanson Overseas BV, 6.75%,
9/15/05 306
-----------------
ENERGY--2.1%
200 Seagull Energy Corp., 7.50%,
9/15/27 203
200 Texaco Capital Inc., 9.45%, 3/1/00 215
-----------------
418
-----------------
FINANCIAL SERVICES--13.7%
400 Advanta Corp., 7.00%, 5/1/01 401
400 Chelsea GCA Realty Partners,
7.25%, 10/21/07 404
200 Ford Motor Credit Co., 7.75%,
10/1/99 206
250 Ford Motor Credit Co., 6.75%,
5/15/05 255
300 Franchise Finance Corp., 7.00%,
11/30/00 306
300 Morgan Stanley Group, 6.875%,
3/1/07 307
250 Norwest Financial Inc., 6.25%,
11/1/02 253
300 Paine Webber Group Inc., MTN,
7.96%, 4/28/00 312
300 Salomon Inc., 6.65%, 7/15/01 304
-----------------
2,748
-----------------
INSURANCE--4.4%
300 Aetna Services, Inc., 6.75%,
8/15/01 307
250 Nationwide Mutual Insurance Co.,
6.50%, 2/15/04 (Acquired
2/9/96, Cost $252)(2) 249
300 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired 5/28/97
through 6/11/97, Cost $304)(2) 330
-----------------
886
-----------------
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
MEDIA & BROADCAST--1.3%
$ 250 Time Warner Inc., 6.85%, 1/15/26 $ 257
-----------------
METALS & MINING--2.1%
400 Barrick Gold Corp., 7.50%, 5/1/07 423
-----------------
REAL ESTATE--4.3%
350 Price REIT, Inc. (The), 7.25%,
11/1/00 358
200 Price REIT, Inc. (The), 7.125%,
6/15/04 205
300 Spieker Properties Inc., 6.80%,
12/15/01 306
-----------------
869
-----------------
RETAIL (GENERAL MERCHANDISE)--2.7%
300 Dayton Hudson Co., 9.25%,
3/1/01 325
200 Sears, Roebuck & Co., Inc., MTN,
8.29%, 6/10/02 216
-----------------
541
-----------------
TOBACCO PRODUCTS--2.5%
250 Philip Morris Companies Inc.,
6.95%, 6/1/01 257
250 Philip Morris Companies Inc.,
7.00%, 7/15/05 254
-----------------
511
-----------------
UTILITIES--5.3%
500 Calenergy Co., Inc., 7.63%,
10/15/07 506
250 Idaho Power Co., 8.65%, 1/1/00 264
300 Pacific Gas & Electric Co., Series
93C, 6.25%, 8/1/03 301
-----------------
1,071
-----------------
TOTAL CORPORATE BONDS--54.6% 11,009
-----------------
(Cost $10,715)
SEE NOTES TO FINANCIAL STATEMENTS
16 INTERMEDIATE-TERM BOND AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
INTERMEDIATE-TERM BOND
OCTOBER 31, 1997
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
FOREIGN CORPORATE BONDS (U.S. $ DENOMINATED)
$ 400 Huchison Whampoa Financial,
6.95%, 8/1/07, (Acquired
8/21/97 through 9/12/97,
Cost $392)(2) $ 371
350 Wharf International Finance Ltd.,
7.625%, 3/13/07 363
-----------------
TOTAL FOREIGN CORPORATE BONDS--3.7% 734
-----------------
(Cost $789)
OTHER CORPORATE DEBT--1.2%
250 Nationsbank Capital Trust III, VRN,
6.31%, 1/15/98, resets
quarterly off the 3-month
LIBOR plus 0.55%,
final maturity 1/15/27 247
-----------------
(Cost $245)
SOVEREIGN GOVERNMENTS & AGENCIES--1.1%
200 Hydro-Quebec, 7.375%, 2/1/03 209
-----------------
(Cost $205)
TEMPORARY CASH INVESTMENTS--3.9%
Repurchase Agreement, Goldman Sachs & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 10/31/97,
due 11/3/97 (Delivery value $792) 792
-----------------
(Cost $792)
TOTAL INVESTMENT SECURITIES--100.0% $20,154
=================
(Cost $19,762)
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
FHLMC = FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA = FEDERAL NATIONAL MORTGAGE ASSOCIATION
GNMA = GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
LIBOR = LONDON INTERBANK OFFERED RATE
MTN = MEDIUM TERM NOTE
VRN = VARIABLE RATE NOTE. INTEREST RESET DATE IS INDICATED. RATE INDICATED IS
EFFECTIVE OCTOBER 31, 1997.
RESETS= THE FREQUENCY WITH WHICH A FIXED-INCOME SECURITY'S COUPON CHANGES,
BASED ON CURRENT MARKET CONDITIONS OR AN UNDERLYING INDEX. THE MORE
FREQUENTLY A SECURITY RESETS, THE LESS RISK THE INVESTOR IS TAKING THAT
THE COUPON WILL VARY SIGNIFICANTLY FROM CURRENT MARKET RATES.
(1) FINAL MATURITY INDICATED. EXPECTED REMAINING AVERAGE LIFE USED FOR PURPOSES
OF CALCULATING THE WEIGHTED AVERAGE PORTFOLIO MATURITY.
(2) SECURITY WAS PURCHASED UNDER RULE 144A OF THE SECURITIES ACT OF 1933 AND,
UNLESS REGISTERED UNDER THE ACT OR EXEMPTED FROM REGISTRATION, MAY ONLY BE
SOLD TO QUALIFIED INSTITUTIONAL INVESTORS. THE AGGREGATE VALUE OF
RESTRICTED SECURITIES AT OCTOBER 31, 1997 WAS $950, WHICH REPRESENTED 4.7%
OF NET ASSETS.
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT INTERMEDIATE-TERM BOND 17
<TABLE>
<CAPTION>
BENHAM BOND
TOTAL RETURNS AS OF OCTOBER 31, 1997(1)
AVERAGE ANNUAL RETURNS
6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS LIFE OF FUND
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS
(inception 3/2/87)
<S> <C> <C> <C> <C> <C> <C>
Benham Bond ....................... 7.02% 8.57% 10.10% 7.12% 8.95% 7.77%
Lehman Aggregate Bond Index ....... 7.07% 8.89% 10.05% 7.51% 9.25% 8.49%
Average A-Rated
Corporate
Debt Fund(2) ...................... 7.07% 8.52% 9.69% 7.33% 9.12% 8.25%(3)
Fund's Ranking Among
A-Rated
Corporate Debt Funds(2) ........... -- 53 out of 131 28 out of 101 32 out of 54 21 out of 34 22 out of 29(3)
- ------------------------------------------------------------------------------------------------------------------------------------
ADVISOR CLASS
(inception 8/8/97)
Benham Bond ....................................................................................................... 3.27%
Lehman Aggregate Bond Index ....................................................................................... 2.95%(4)
- ----------
(1) RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT ANNUALIZED.
(2) ACCORDING TO LIPPER ANALYTICAL SERVICES.
(3) SINCE 3/31/87, THE DATE NEAREST THE CLASS' INCEPTION FOR WHICH DATA ARE
AVAILABLE.
(4) SINCE 8/31/97, THE DATE NEAREST THE CLASS' INCEPTION FOR WHICH DATA ARE
AVAILABLE.
</TABLE>
See pages 40-41 for more information about returns, the comparative index and
Lipper fund rankings.
[mountain graph - data below]
GROWTH OF $10,000 OVER TEN YEARS (Investor Class)
$10,000 investment made 10/31/87
Value of 10/31/97
Lehman Aggregate
Benham Bond Bond Index
Oct-87 $10,000 $10,000
Dec-87 $10,383 $10,217
Mar-88 $10,825 $10,601
Jun-88 $10,881 $10,726
Sep-88 $11,088 $10,940
Dec-88 $11,249 $11,023
Mar-89 $11,287 $11,149
Jun-89 $12,316 $12,037
Sep-89 $12,358 $12,173
Dec-89 $12,822 $12,626
Mar-90 $12,363 $12,525
Jun-90 $12,818 $12,982
Sep-90 $12,766 $13,094
Dec-90 $13,597 $13,756
Mar-91 $13,879 $14,140
Jun-91 $14,035 $14,372
Sep-91 $14,979 $15,188
Dec-91 $15,976 $15,958
Mar-92 $15,632 $15,754
Jun-92 $16,279 $16,391
Sep-92 $16,999 $17,095
Dec-92 $16,870 $17,141
Mar-93 $17,602 $17,849
Jun-93 $18,056 $18,322
Sep-93 $18,610 $18,801
Dec-93 $18,580 $18,812
Mar-94 $17,976 $18,272
Jun-94 $17,682 $18,084
Sep-94 $17,719 $18,194
Dec-94 $17,747 $18,263
Mar-95 $18,690 $19,184
Jun-95 $20,013 $20,352
Sep-95 $20,419 $20,751
Dec-95 $21,348 $21,635
Mar-96 $20,827 $21,252
Jun-96 $20,865 $21,373
Sep-96 $21,215 $21,768
Dec-96 $21,867 $22,422
Mar-97 $21,720 $22,296
Jun-97 $22,495 $23,114
Sep-97 $23,280 $23,882
Oct-97 $23,567 $24,228
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing the fund's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the index's
total return line does not.
PORTFOLIO AT A GLANCE
10/31/97 10/31/96
Number of Securities 46 46
Weighted Average Maturity 10.8 years 11.0 years
Average Duration 5.0 years 5.0 years
Expense Ratio (Investor Class) 0.80% 0.79%
YIELD AS OF OCTOBER 31, 1997
30-DAY
SEC
YIELD
Investor Class 6.09%
Advisor Class 5.78%
30-Day SEC Yield is defined in the Glossary on page 41.
Many of the investment terms in this report are defined in the Glossary on page
41.
18 BENHAM BOND AMERICAN CENTURY INVESTMENTS
BENHAM BOND
MANAGEMENT Q & A
An interview with Bud Hoops and Jeff Houston, portfolio managers on the
Benham Bond fund investment team.
HOW DID THE FUND PERFORM?
For the fiscal year ended October 31, 1997, the fund's Investor Class shares
returned 8.57%, compared with the 8.52% average return of the 131 "A-Rated
Corporate Debt Funds" tracked by Lipper Analytical Services. The fund's
benchmark, the Lehman Aggregate Bond Index, returned 8.89% for the period.
Please keep in mind that the fund is subject to operating expenses (such as
transaction costs and managment fees), while the benchmark is not. (See the
Total Returns table on the previous page for other fund performance
comparisons.)
DID YOU CHANGE THE FUND'S DURATION MUCH DURING THE FISCAL YEAR?
Not much. We maintained a steady, conservative approach to managing the
fund's duration, keeping it within a narrow range around 5 years--roughly
neutral compared with its peers. This position helped insulate the fund's
returns from interim market volatility.
WAS THIS NEUTRAL POSITIONING THE MAIN REASON WHY THE FUND'S PERFORMANCE WAS IN
LINE WITH ITS PEERS?
Yes. We tend to avoid making interest rate bets that can cause unwanted
volatility in the fund's returns. Rather than looking to add incremental return
through aggressive duration management, we try to add value to the fund's
returns in other ways.
[bar graph - data below]
BENHAM BOND'S ONE-YEAR RETURNS FOR THE PAST TEN YEARS*
(Periods ended October 31)
Lehman Aggregate
Benham Bond Bond Index
10/88 12.29% 11.46%
10/89 13.52% 11.90%
10/90 1.93% 6.31%
10/91 16.45% 15.81%
10/92 10.43% 9.83%
10/93 11.81% 11.87%
10/94 -5.47% -3.67%
10/95 17.16% 15.65%
10/96 4.91% 5.85%
10/97 8.57% 8.89%
This graph illustrates the fund's returns over the past 10 years and compares
them with the index's returns. The fund's total returns include operating
expenses, while the index's do not. See page 40 for a definition of the index.
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
* Investor Class.
ANNUAL REPORT BENHAM BOND 19
BENHAM BOND
One method is to keep the majority of the fund's assets in higher-yielding
securities, such as corporate, asset- and mortgage-backed securities. We tend to
look for these types of securities when bond yields are relatively stable
because coupon payments usually comprise more of a bond's returns in such
environments.
Another method we use to add value to the fund is to search for what we
believe are undervalued securities with the potential to appreciate.
HOW DID THE CORPORATE CREDIT RESEARCH TEAM HELP LOCATE THESE UNDERVALUED
SECURITIES?
Our strong credit research staff continued to make many accurate assessments
of specific credit situations. The credit team's diligent efforts led to the
purchase of many undervalued securities that subsequently appreciated in value.
To strengthen our ability to locate such securities, we bolstered our credit
staff during the fiscal year, adding three new members to the team, including an
asset-backed securities specialist. We feel our strong research staff gives the
fund a competitive advantage, allowing us to find attractive issues that other
funds lacking such resources might have passed over.
WHY DID CORPORATE SECURITIES PERFORM SO WELL DURING THE PERIOD?
These securities continued to benefit from a vibrant national economy, which
has helped strengthen U.S. businesses and boost corporate profits. Corporate
bonds typically offer higher yields than many other fixed-income securities as
compensation for their greater credit risk. However, improving corporate balance
sheets have led to lower yields for corporate debt and stronger demand from
investors. The rapid pace of stock-financed corporate mergers and acquisitions
also improved corporate credit by encouraging economies of scale and eliminating
inefficiencies. Heavy demand from mutual fund managers and foreign buyers also
helped increase prices and lower yields on corporate bonds.
As a result, the yield spread, or interest rate difference, between
comparable-maturity corporate and Treasury securities continued to decrease as
investors reached for the higher yields of corporate bonds. This continued
compression made finding attractively valued securities in this sector more
difficult.
WHAT ARE SOME OF THE POSITIVE FACTORS THAT COULD COME INTO PLAY FOR FIXED-INCOME
SECURITIES OVER THE NEXT SIX MONTHS?
Several fairly recent developments could continue to work in the bond
market's favor going forward. One of those would be continued benign inflation
levels. Another factor would be further improvements in reducing the federal
budget deficit. As the Treasury continues to issue fewer securities, the value
of existing bonds increase.
Stock-market volatility could also play a role in boosting returns for
asset-backed, government-agency, Treasury and other fixed-income securities.
[pie charts]
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 10/31/97)
Corporate Bonds 62%
U.S. Treasury Securities 10%
Mortgage-Backed Securities 10%
Asset-Backed Securities 6%
Foreign Governments &
Agencies 5%
Other 7%
PORTFOLIO COMPOSITION BY SECURITY TYPE (as of 4/30/97)
Corporate Bonds 61%
Mortgage-Backed Securities 14%
U.S. Treasury Securities 11%
Asset-Backed Securities 6%
Foreign Governments &
Agencies 5%
Other 3%
20 BENHAM BOND AMERICAN CENTURY INVESTMENTS
BENHAM BOND
If stocks remain volatile, more investors could seek fixed-income securities
as a safer investment alternative. Corporate fixed-income securities, however,
would likely receive little benefit from such volatility.
DO YOU HAVE ANY CONCERNS ABOUT THE MARKET GOING FORWARD?
Yes, we have a few. The U.S. economic expansion is now in its seventh year,
very old from a historical perspective. Generally, rising prices and other
cyclical pressures tend to appear this far into an expansionary phase. We
believe the historical threat of such pressures is part of the reason why the
Federal Reserve remains concerned about the prospects for inflation, and we
share this concern.
WHAT MIGHT CAUSE THIS CONCERN TO BECOME REALITY?
Further signs that wage pressures are causing inflation to accelerate could
certainly do the trick. If wages continue to rise, it could be a harbinger for
higher interest rates. That's because such pressures could force the Federal
Reserve to raise short-term interest rates in order to keep inflation within
manageable levels.
Wages and other employment costs are an important consideration for
inflation because they account for nearly two-thirds of total business costs.
Although savings on health care and benefits and improvements in worker
productivity have offset wage increases, these savings may have run their
course.
ARE THERE ANY OTHER MAJOR TRENDS YOU'RE MONITORING?
We continue to watch developments in Asia with a careful eye. Banking
problems in Japan and South Korea merit close scrutiny because of the
potentially negative repercussions of such problems on U.S. corporations with
large overseas investments.
WITH THIS OUTLOOK IN MIND, WHAT ARE YOUR PLANS FOR THE FUND GOING FORWARD?
For now, we plan to maintain the fund's neutral duration until we see a
clearer direction for the U.S. economy and inflation. We will also continue
working closely with our research staff to uncover attractively valued
securities with the potential to enhance the fund's return.
[pie charts]
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 10/31/97)
AAA 34%
AA 4%
A 41%
BBB 21%
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 4/30/97)
AAA 36%
AA 5%
A 37%
BBB 22%
ANNUAL REPORT BENHAM BOND 21
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
BENHAM BOND
OCTOBER 31, 1997
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
U.S. TREASURY SECURITIES
<S> <C> <C>
$1,500 U.S. Treasury Notes, 5.875%,
1/31/99 $ 1,505
6,000 U.S. Treasury Notes, 5.50%,
12/31/00 5,961
2,000 U.S. Treasury Notes, 6.25%,
6/30/02 2,039
3,000 U.S. Treasury Notes, 5.875%,
9/30/02 3,017
-----------------
TOTAL U.S. TREASURY SECURITIES--10.0% 12,522
-----------------
(Cost $12,522 )
U.S. GOVERNMENT AGENCY SECURITIES--1.6%
2,000 Tennesse Valley Authority, 6.875%,
12/15/43 1,990
-----------------
(Cost $1,854 )
MORTGAGE-BACKED SECURITIES(1)
610 FHLMC REMIC, Series 19,
Class E PAC, 8.00%, 8/15/19 617
834 FHLMC REMIC, Series 116,
Class F PAC, 8.50%, 2/15/20 856
4,574 FNMA Pool #250452, 6.50%,
1/1/26 4,508
970 FNMA REMIC, Series 1989-35,
Class G, 9.50%, 7/25/19 1,048
425 FNMA REMIC, Series 1990-88,
Class H PAC, 7.75%, 9/25/19 426
576 FNMA REMIC, Series 1991-21,
Class G PAC, 6.00%, 12/25/19 575
3,746 GNMA Pool #423865, 8.00%,
6/15/26 3,894
-----------------
TOTAL MORTGAGE-BACKED
SECURITIES--9.6% 11,924
-----------------
(Cost $11,531)
ASSET-BACKED SECURITIES(1)
3,000 The Money Store Home Equity
Trust, Series 1996-D, Class A3,
6.295%, 11/15/11 3,011
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
$4,271 United Companies Financial Corp.,
Home Equity Loan, Series
1995-D1, Class A2, 6.20%,
3/10/14 $ 4,294
-----------------
TOTAL ASSET-BACKED SECURITIES--5.8% 7,305
-----------------
(Cost $7,241)
CORPORATE BONDS
AEROSPACE & DEFENSE--1.7%
2,000 Lockheed Martin Corp., 7.25%,
5/15/06 2,110
-----------------
AIRLINES--2.7%
3,232 Delta Air Lines Inc., 7.54%,
10/11/11 3,382
-----------------
BANKING--17.5%
5,000 Citicorp Euro, 7.00%, 1/2/04 5,162
2,000 Corestates Capital Corp., 5.875%,
10/15/03 1,948
3,000 First Union Corp., 8.77%,
11/15/04 3,157
5,000 National Bank of Canada, 8.125%,
8/15/04 5,444
2,000 Nationsbank Capital Trust II, 7.83%,
12/15/26 2,070
2,000 Santander Financial Issuances Ltd.,
6.375%, 2/15/11 1,943
2,000 Wells Fargo Capital, 7.96%,
12/15/26 2,075
-----------------
21,799
-----------------
CHEMICALS & RESINS--5.3%
5,000 ARCO Chemical Co., 10.25%,
11/1/10 6,663
-----------------
COMPUTER SYSTEMS--1.2%
1,500 International Business Machines
Corp., 7.125%, 12/1/2096 1,528
-----------------
ENERGY--2.5%
3,000 Columbia Gas Systems, 7.42%,
11/28/15 3,101
-----------------
FINANCIAL SERVICES--8.2%
3,000 Ford Motor Credit Co., 6.50%,
2/28/02 3,034
SEE NOTES TO FINANCIAL STATEMENTS
22 BENHAM BOND AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
BENHAM BOND
OCTOBER 31, 1997
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
$4,000 Lehman Brothers Holdings Inc.,
6.625%, 11/15/00 $ 4,035
3,000 Paine Webber Group Inc., MTN,
7.96%, 4/28/00 3,124
-----------------
10,193
-----------------
INSURANCE--5.5%
1,000 Delphi Financial Group, Inc., 9.31%,
3/25/27 1,104
3,000 Lincoln National Corp., 9.125%,
10/1/24 3,592
2,000 Zurich Capital Trust I, 8.38%,
6/1/37 (Acquired 6/11/97,
Cost $2,059)(2) 2,200
-----------------
6,896
-----------------
MEDIA & BROADCAST--4.1%
3,000 News America Holdings, 7.60%,
10/11/15 3,019
2,000 Time Warner Inc., 6.85%, 1/15/26 2,058
-----------------
5,077
-----------------
REAL ESTATE--5.0%
1,000 Chelsea GCA Realty Partners,
7.25%, 10/21/07 1,010
2,000 Price REIT, Inc. (The), 7.125%,
6/15/04 2,047
3,000 Spieker Properties Inc., MTN,
7.58%, 12/17/01 3,139
-----------------
6,196
-----------------
TOBACCO--2.4%
1,500 Philip Morris Companies Inc.,
6.80%, 12/1/03 1,513
1,500 Philip Morris Companies Inc.,
7.00%, 7/15/05 1,524
-----------------
3,037
-----------------
UTILITIES--6.4%
3,000 Calenergy Company, Inc., 7.63%,
10/15/07 3,037
5,000 Pacific Gas & Electric Co., 5.50%,
6/1/99 4,969
-----------------
8,006
-----------------
TOTAL CORPORATE BONDS--62.5% 77,988
-----------------
(Cost $74,704)
Principal Amount ($ IN THOUSANDS) Value
- -----------------------------------------------------------------------------------
FOREIGN CORPORATE BONDS (U.S. $ DENOMINATED)
$1,000 Hutchison Whampoa Financial,
6.95%, 8/1/07 (Acquired
8/21/97, Cost $1,967)(2) $ 928
1,500 Wharf International Finance Ltd.,
7.625%, 3/13/07 1,554
-----------------
TOTAL FOREIGN CORPORATE BONDS --2.0% 2,482
-----------------
(Cost $2,472)
SOVEREIGN GOVERNMENTS & AGENCIES
3,000 Korea Electric Power, 6.375%,
12/1/03 2,816
4,000 Province of Quebec Bonds,
7.125%, 2/9/24 4,040
-----------------
TOTAL SOVEREIGN GOVERNMENTS
& AGENCIES--5.5% 6,856
-----------------
(Cost $6,687)
TEMPORARY CASH INVESTMENTS--3.0%
Repurchase Agreement, Goldman Sachs & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated
10/31/97, due 11/3/97 (Delivery value
$3,697) 3,695
-----------------
(Cost $3,695)
TOTAL INVESTMENT SECURITIES--100.0% $124,762
=================
(Cost $120,706)
NOTES TO SCHEDULE OF INVESTMENTS
FHLMC = FEDERAL HOME LOAN MORTGAGE CORPORATION
FNMA = FEDERAL NATIONAL MORTGAGE ASSOCIATION
GNMA = GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
MTN = MEDIUM TERM NOTE
(1) FINAL MATURITY INDICATED. EXPECTED REMAINING MATURITY USED FOR PURPOSES OF
CALCULATING THE WEIGHTED AVERAGE PORTFOLIO MATURITY.
(2) SECURITY WAS PURCHASED UNDER RULE 144A OF THE SECURITIES ACT OF 1933 AND,
UNLESS REGISTERED UNDER THE ACT OR EXEMPTED FROM REGISTRATION, MAY ONLY BE
SOLD TO QUALIFIED INSTITUTIONAL INVESTORS. THE AGGREGATE VALUE OF
RESTRICTED SECURITIES AT OCTOBER 31, 1997, WAS $3,128, WHICH REPRESENTED
2.5% OF NET ASSETS.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT BENHAM BOND 23
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES
LIMITED-TERM INTERMEDIATE-TERM BENHAM
OCTOBER 31, 1997 BOND BOND BOND
ASSETS ($ AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Investment securities, at value (identified
cost of $14,757, $19,762 and $120,706,
respectively) (Note 3) .................. $ 14,885 $ 20,154 $ 124,762
Cash ...................................... 155 -- --
Receivable for investments sold ........... -- 490 1,011
Interest receivable ....................... 243 318 2,362
------------ ------------ ------------
15,283 20,962 128,135
------------ ------------ ------------
LIABILITIES
Disbursements in excess of demand
deposit cash ............................ 3 476 899
Payable for capital shares redeemed ....... 2 22 105
Payable for investments purchased ......... -- 309 --
Accrued management fees (Note 2) .......... 9 12 88
------------ ------------ ------------
14 819 1,092
------------ ------------ ------------
Net Assets ................................ $ 15,269 $ 20,143 $ 127,043
============ ============ ============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ... $ 15,113 $ 19,737 $ 122,643
Accumulated undistributed net realized
gain from investment transactions ....... 28 14 344
Net unrealized appreciation on
investments (Note 3) .................... 128 392 4,056
------------ ------------ ------------
$ 15,269 $ 20,143 $ 127,043
============ ============ ============
Investor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ $ 15,269,212 $ 18,125,968 $126,580,425
Shares outstanding ........................ 1,529,778 1,799,193 13,010,416
Net asset value per share ................. $ 9.98 $ 10.07 $ 9.73
Advisor Class, $0.01 Par Value
($ and shares in full)
Net assets ................................ -- $ 2,017,252 $ 462,292
Shares outstanding ........................ -- 200,246 47,506
Net asset value per share ................. -- $ 10.07 $ 9.73
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
24 STATEMENTS OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
LIMITED-TERM INTERMEDIATE-TERM BENHAM
YEAR ENDED OCTOBER 31, 1997 BOND BOND BOND
INVESTMENT INCOME ($ IN THOUSANDS)
Income:
<S> <C> <C> <C>
Interest $712 $1,190 $ 9,335
----------- ----------- -----------
Expenses:
Management fees (Note 2) 78 132 1,058
Directors' fees and expenses -- -- 1
----------- ----------- -----------
78 132 1,059
----------- ----------- -----------
Net investment income 634 1,058 8,276
----------- ----------- -----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3)
Net realized gain on investments 26 19 350
Change in net unrealized appreciation
on investments 76 316 2,059
----------- ----------- -----------
Net realized and unrealized
gain on investments 102 335 2,409
----------- ----------- -----------
Net Increase in Net Assets
Resulting from Operations $736 $1,393 $10,685
=========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT STATEMENTS OF OPERATIONS 25
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
YEARS ENDED OCTOBER 31, 1997 LIMITED-TERM INTERMEDIATE-TERM BENHAM
AND OCTOBER 31, 1996 BOND BOND BOND
Increase (Decrease) in Net Assets 1997 1996 1997 1996 1997 1996
OPERATIONS ($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net investment income ........ $ 634 $ 432 $ 1,058 $ 874 $ 8,276 $ 9,024
Net realized gain (loss)
on investments .............. 26 13 19 (4) 350 1,341
Change in net unrealized
appreciation (depreciation)
on investments .............. 76 (31) 316 (131) 2,059 (3,546)
--------- --------- --------- --------- --------- ---------
Net increase in net assets
resulting from operations ... 736 414 1,393 739 10,685 6,819
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income:
Investor Class .............. (634) (432) (1,052) (874) (8,273) (9,024)
Advisor Class ............... -- -- (6) -- (3) --
From net realized gains
from investment transactions:
Investor Class .............. -- -- -- (132) (1,310) (228)
--------- --------- --------- --------- --------- ---------
Decrease in net assets
from distributions .......... (634) (432) (1,058) (1,006) (9,586) (9,252)
--------- --------- --------- --------- --------- ---------
CAPITAL SHARE TRANSACTIONS
(NOTE 4)
Net increase (decrease)
in net assets from capital
share transactions .......... 7,075 917 4,182 3,066 (16,623) (4,223)
--------- --------- --------- --------- --------- ---------
Net increase (decrease)
in net assets ............... 7,177 899 4,517 2,799 (15,524) (6,656)
NET ASSETS
Beginning of year ............ 8,092 7,193 15,626 12,827 142,567 149,223
--------- --------- --------- --------- --------- ---------
End of year .................. $ 15,269 $ 8,092 $ 20,143 $ 15,626 $ 127,043 $ 142,567
========= ========= ========= ========= ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
26 STATEMENTS OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham Limited-Term Bond Fund
(Limited-Term), American Century - Benham Intermediate-Term Bond Fund
(Intermediate-Term), and American Century - Benham Bond Fund (Benham Bond) (the
Funds) are three of the thirteen series of funds issued by the Corporation. The
investment objective of Limited-Term is to seek income. The investment objective
of Intermediate-Term is to seek a competitive level of income. The investment
objective of Benham Bond is to seek a high level of income. The Funds pursue
their objectives by investing primarily in bonds and other debt obligations with
maturities based on each Funds' investment objective. The Funds are authorized
to issue two classes of shares: the Investor Class and the Advisor Class. The
two classes of shares differ principally in their respective shareholder
servicing and distribution expenses and arrangements. All shares of the Fund
represent an equal pro rata interest in the assets of the class to which such
shares belong, and have identical voting, dividend, liquidation and other rights
and the same terms and conditions, except for class specific expenses and
exclusive rights to vote on matters affecting only individual classes. Sale of
the Advisor class for Intermediate-Term and Benham Bond commenced August 14,
1997 and August 8, 1997, respectively. Sale of the Advisor class for
Limited-Term had not commenced as of the report date. The following significant
accounting policies, related to all classes of the Funds, are in accordance with
accounting policies generally accepted in the investment company industry.
SECURITY VALUATIONS--Portfolio securities are valued through valuations
obtained through a commercial pricing service or at the mean of the most recent
bid and asked prices. When valuations are not readily available, securities are
valued at fair value as determined in accordance with procedures adopted by the
Board of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income is recorded on the accrual basis and
includes amortization of discounts and accretion of premiums.
REPURCHASE AGREEMENTS--The Funds may enter into repurchase agreements with
institutions the Funds' investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Funds require that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
Funds to obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the value of the securities
transferred to ensure the value, including accrued interest, of the securities
under each repurchase agreement is equal to or greater than amounts owed to the
Funds under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Funds, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the Funds' policy to distribute all taxable income
and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are
declared daily and distributed monthly. Distributions from net realized gains
are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are primarily due to differences
in the recognition of income and expense items for financial statement and tax
purposes.
ADDITIONAL INFORMATION--Certain officers and directors of the Corporation
are also officers and/or directors, and as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc., ACIS, and the Corporation's transfer agent, American Century
Services Corporation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 27
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into Management Agreements with ACIM that
provide each Fund with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreements provide that all
expenses of the Funds, except brokerage commissions, taxes, interest, expenses
of those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will by paid by ACIM. The fee is computed daily and paid monthly based
on each Fund's class average daily closing net assets during the previous month.
The annual management fee for the Investor Class of Limited-Term,
Intermediate-Term, and Benham Bond is 0.70%, 0.75% and 0.80%, respectively. The
annual management fee for the Advisor Class of Intermediate-Term and Benham Bond
is 0.50% and 0.55%, respectively.
The Board of Directors has adopted a shareholder services and distribution
plan for the Advisor Class, pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Advisor Class Master Distribution and Shareholder Services Plan
provides that the Funds will pay ACIM an annual distribution fee equal to 0.25%
and service fee equal to 0.25%. The fees are computed daily and paid monthly
based on the Advisor Class's average daily closing net assets during the
previous month. The distribution fee provides compensation for distribution
expenses incurred by financial intermediaries in connection with distributing
shares of the Advisor Class including, but not limited to, payments to brokers,
dealers, and financial institutions that have entered into sales agreements with
respect to shares of the funds. The service fee provides compensation for
shareholder and administrative services rendered by ACIM, its affiliates or
independent third party providers. Fees incurred under the Master Distribution
and Shareholder Services Plan for Intermediate-Term during the period August 14,
1997 (commencement of sale of the Advisor class) through October 31, 1997, were
$480. Fees incurred under the Master Distribution and Shareholder Services Plan
for Benham Bond during the period August 8, 1997 (commencement of sale of the
Advisor class) through October 31, 1997, were $279.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Investment transactions, excluding short-term investments, for the year ended
October 31, 1997, were as follows:
<TABLE>
<CAPTION>
BENHAM
LIMITED-TERM INTERMEDIATE-TERM BOND
PURCHASES ($ IN THOUSANDS)
<S> <C> <C> <C>
U. S. Treasury & Agency Obligations ........... $8,275 $ 8,637 $25,476
Other Debt Obligations ......................... 7,424 11,434 40,797
PROCEEDS FROM SALES ($ IN THOUSANDS)
U. S. Treasury & Agency Obligations ............ $7,237 $ 8,868 $53,470
Other Debt Obligations ......................... 2,401 7,716 32,190
On October 31, 1997, the composition of unrealized appreciation and
depreciation of investment securities based on the aggregate cost of investments
for federal income tax purposes was as follows:
BENHAM
LIMITED-TERM INTERMEDIATE-TERM BOND
($ IN THOUSANDS)
Appreciation ................................... $134 $418 $4,397
Depreciation ................................... (6) (26) (341)
--------- ---------- ---------
Net ............................................ $128 $392 $4,056
========= ========== =========
The aggregate cost of investments for federal income tax purposes was the same
as the cost for financial reporting purposes.
</TABLE>
28 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
4. CAPITAL SHARE TRANSACTIONS
There are 100,000,000 and 50,000,000 shares of the Investor Class and Advisor
class, respectively, authorized for issuance by each Fund. Transactions in
shares of the Funds were as follows:
LIMITED-TERM INTERMEDIATE-TERM BENHAM BOND
Shares Amount Shares Amount Shares Amount
INVESTOR CLASS (IN THOUSANDS)
Year ended October 31, 1997
<S> <C> <C> <C> <C> <C> <C>
Sold .............................. 1,315 $13,023 1,569 $15,513 5,099 $ 48,694
Issued in reinvestment
of distributions ................ 62 615 95 942 946 9,015
Redeemed .......................... (662) (6,563) (1,442) (14,279) (7,835) (74,792)
-------- -------- -------- -------- -------- ---------
Net increase (decrease) ........... 715 $ 7,075 222 $ 2,176 (1,790) $(17,083)
======== ======== ======== ======== ======== =========
Year ended October 31, 1996
Sold .............................. 300 $ 2,982 1,005 $ 9,981 6,596 $ 63,329
Issued in reinvestment
of distributions ................ 42 413 90 895 891 8,559
Redeemed .......................... (249) (2,478) (792) (7,810) (7,937) (76,111)
-------- -------- -------- -------- -------- ---------
Net increase (decrease) ........... 93 $ 917 303 $ 3,066 (450) $ (4,223)
======== ======== ======== ======== ======== =========
ADVISOR CLASS (IN THOUSANDS)
Period ended October 31, 1997(1)
Sold .............................. -- -- 199 $2,000 61 $588
Issued in reinvestment
of distributions ................ -- -- 1 6 1 3
Redeemed .......................... -- -- -- -- (14) (131)
-------- -------- -------- -------- -------- ---------
Net increase ...................... -- -- 200 $2,006 48 $460
======== ======== ======== ======== ======== =========
</TABLE>
(1) AUGUST 14, 1997 (COMMENCEMENT OF SALE OF THE ADVISOR CLASS) THROUGH OCTOBER
31, 1997 FOR INTERMEDIATE-TERM. AUGUST 8, 1997 (COMMENCEMENT OF SALE OF THE
ADVISOR CLASS) THROUGH OCTOBER 31, 1997 FOR BENHAM BOND.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 29
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
LIMITED-TERM BOND
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Investor
Class
1997 1996 1995 1994(1)
PER-SHARE DATA
Net Asset Value,
<S> <C> <C> <C> <C>
Beginning of Period .................... $9.93 $9.96 $9.68 $10.00
--------- --------- --------- ---------
Income From Investment Operations
Net Investment Income ................ 0.56 0.56 0.56 0.31
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ......................... 0.05 (0.03) 0.28 (0.32)
--------- --------- --------- ---------
Total From Investment Operations ..... 0.61 0.53 0.84 (0.01)
--------- --------- --------- ---------
Distributions
From Net Investment Income ........... (0.56) (0.56) (0.56) (0.31)
--------- --------- --------- ---------
Net Asset Value, End of Period ......... $9.98 $9.93 $9.96 $9.68
========= ========== ========= =========
Total Return(2) ...................... 6.30% 5.48% 8.89% (0.08)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets .................. 0.69% 0.68% 0.69% 0.70%(3)
Ratio of Net Investment Income
to Average Net Assets .................. 5.63% 5.63% 5.70% 4.79%(3)
Portfolio Turnover Rate ................ 109% 121% 116% 48%
Net Assets, End
of Period (in thousands) ............... $15,269 $8,092 $7,193 $4,375
</TABLE>
(1) MARCH 1, 1994 (INCEPTION) THROUGH OCTOBER 31, 1994.
(2) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS, IF ANY. TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
(3) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
30 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
INTERMEDIATE-TERM BOND
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Investor Advisor
Class Class
1997 1996 1995 1994(1) 1997(2)
PER-SHARE DATA
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................. $9.91 $10.07 $9.53 $10.00 $9.96
---------- ---------- ---------- ---------- ----------
Income From Investment Operations
Net Investment Income ............. 0.59 0.58 0.59 0.34 0.12
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ...................... 0.16 (0.06) 0.54 (0.47) 0.11
---------- ---------- ---------- ---------- ----------
Total From Investment Operations .. 0.75 0.52 1.13 (0.13) 0.23
---------- ---------- ---------- ---------- ----------
Distributions
From Net Investment Income ........ (0.59) (0.58) (0.59) (0.34) (0.12)
From Net Realized Gains
on Investment Transactions ........ -- (0.10) -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ............... (0.59) (0.68) (0.59) (0.34) (0.12)
---------- ---------- ---------- ---------- ----------
Net Asset Value, End of Period ...... $10.07 $9.91 $10.07 $9.53 $10.07
========== ========== ========== ========== ==========
Total Return(3) ................... 7.87% 5.36% 12.19% (1.24)% 2.33%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses
to Average Net Assets ............... 0.75% 0.74% 0.74% 0.75%(4) 1.00%(4)
Ratio of Net Investment Income
to Average Net Assets ............... 5.99% 5.90% 6.05% 5.23%(4) 5.92%(4)
Portfolio Turnover Rate ............. 99% 87% 133% 48% 99%
Net Assets, End
of Period (in thousands) ............ $18,126 $15,626 $12,827 $4,262 $2,017
</TABLE>
(1) MARCH 1, 1994 (INCEPTION) THROUGH OCTOBER 31, 1994.
(2) AUGUST 14, 1997 (COMMENCEMENT OF SALE OF THE ADVISOR CLASS) THROUGH OCTOBER
31, 1997.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS, IF ANY. TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
(4) ANNUALIZED.
SEE NOTES TO FINANCIAL STATEMENTS
ANNUAL REPORT FINANCIAL HIGHLIGHTS 31
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
BENHAM BOND
FOR A SHARE OUTSTANDING THROUGHOUT THE YEARS ENDED OCTOBER 31 (EXCEPT AS NOTED)
Investor
Advisor
Class
Class
1997 1996 1995 1994 1993(1) 1997(2)
PER-SHARE DATA
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................. $9.63 $9.78 $8.91 $10.21 $9.92 $9.55
--------- -------- -------- -------- --------- --------
Income From Investment Operations
Net Investment Income ............. 0.60 0.60 0.61 0.58 0.66 0.13
Net Realized and Unrealized
Gain (Loss) on Investment
Transactions ...................... 0.19 (0.14) 0.87 (1.12) 1.88 0.18
--------- -------- -------- -------- --------- --------
Total From Investment Operations .. 0.79 0.46 1.48 (0.54) 2.54 0.31
--------- -------- -------- -------- --------- --------
Distributions
From Net Investment Income ........ (0.60) (0.60) (0.61) (0.58) (0.66) (0.13)
From Net Realized Gains on
Investment Transactions ........... (0.09) (0.01) -- (0.18) (1.59) --
--------- -------- -------- -------- --------- --------
Total Distributions ............... (0.69) (0.61) (0.61) (0.76) (2.25) (0.13)
--------- -------- -------- -------- --------- --------
Net Asset Value, End of Period ...... $9.73 $9.63 $9.78 $8.91 $10.21 $9.73
========= ======== ======== ======== ========= ========
Total Return(3) ................... 8.57% 4.91% 17.16% (5.47)% 11.81% 3.27%
RATIOS/SUPPLEMENTAL RATIOS
Ratio of Operating Expenses
to Average Net Assets ............... 0.80% 0.79% 0.78% 0.88% 1.00% 1.05%(4)
Ratio of Net Investment Income
to Average Net Assets ............... 6.25% 6.18% 6.53% 6.07% 6.54% 5.92%(4)
Portfolio Turnover Rate ............. 52% 100% 105% 78% 113% 52%
Net Assets, End
of Period (in thousands) ............$126,580 $142,567 $149,223 $121,012 $172,120 $462
(1) THE DATA PRESENTED HAS BEEN RESTATED TO GIVE EFFECT TO A 10 FOR 1 STOCK
SPLIT IN THE FORM OF A STOCK DIVIDEND THAT OCCURRED ON NOVEMBER 13, 1993.
(2) AUGUST 8, 1997 (COMMENCEMENT OF SALE OF THE ADVISOR CLASS) THROUGH OCTOBER
31, 1997.
(3) TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS
DISTRIBUTIONS, IF ANY. TOTAL RETURNS FOR PERIODS LESS THAN ONE YEAR ARE NOT
ANNUALIZED.
(4) ANNUALIZED.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
32 FINANCIAL HIGHLIGHTS AMERICAN CENTURY INVESTMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Century Mutual Funds, Inc:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of American Century - Benham
Limited-Term Bond Fund, American Century - Benham Intermediate-Term Bond Fund
and American Century - Benham Bond Fund (collectively the "Funds"), three of the
funds comprising American Century Mutual Funds, Inc. (formerly Twentieth Century
Investors, Inc.), as of October 31, 1997, and the related statements of
operations and changes in net assets for the year then ended, and the financial
highlights for the year then ended. These financial statements and the financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and the financial
highlights based on our audits. The financial statements and the financial
highlights of the Funds for each of the periods in the four-year period ended
October 31, 1996 were audited by other auditors whose report, dated November 20,
1996, expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of American Century -
Benham Limited-Term Bond Fund, American Century - Benham Intermediate-Term Bond
Fund and American Century - Benham Bond Fund as of October 31, 1997, the results
of their operations, the changes in their net assets, and the financial
highlights for the year then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 26, 1997
ANNUAL REPORT INDEPENDENT AUDITORS' REPORT 33
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the ensuing
year or until their successors are elected and qualified.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
James E. Stowers, Jr.
For: 1,310,162 1,354,797 7,970,982
Withheld: 1,800 7,267 162,778
James E. Stowers III
For: 1,310,162 1,352,925 7,968,225
Withheld: 1,800 9,139 165,535
Thomas A. Brown
For: 1,310,162 1,354,797 7,971,632
Withheld: 1,800 7,267 162,128
Robert W. Doering, M.D.
For: 1,310,162 1,354,539 7,960,473
Withheld: 1,800 7,525 173,287
D.D. (Del) Hock
For: 1,310,162 1,354,797 7,969,426
Withheld: 1,800 7,267 164,334
Linsley L. Lundgaard
For: 1,310,162 1,354,797 7,966,601
Withheld: 1,800 7,267 167,159
Donald H. Pratt
For: 1,310,162 1,354,797 7,971,376
Withheld: 1,800 7,267 162,384
Lloyd T. Silver, Jr.
For: 1,310,162 1,354,797 7,968,400
Withheld: 1,800 7,267 165,360
M. Jeannine Strandjord
For: 1,310,162 1,354,797 7,981,848
Withheld: 1,800 7,267 151,912
PROPOSAL 2:
To vote on approval of a Management Agreement with American Century
Investment Management, Inc.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,280,854 1,350,545 7,875,601
Against: 16,225 9,130 194,788
Abstain: 2,063 1,994 22,002
Broker
Non-Vote: 12,820 395 41,369
PROPOSAL 3:
To vote on the selection by the Board of Directors of Deloitte & Touche LLP
as independent auditors for the Corporation.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,302,936 1,353,765 7,935,217
Against: 8,075 6,370 179,522
Abstain: 951 1,929 19,021
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the
following items:
* Eliminate the fundamental investment limitation concerning diversification of
investments.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,280,990 1,341,466 7,684,559
Against: 16,862 18,131 371,466
Abstain: 1,290 2,072 36,366
Broker
Non-Vote: 12,820 395 41,369
34 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,279,878 1,341,772 7,699,972
Against: 16,862 17,825 355,963
Abstain: 2,402 2,072 36,456
Broker
Non-Vote: 12,820 395 41,369
* Amend the fundamental investment limitation concerning borrowing.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,280,990 1,337,608 7,659,778
Against: 16,862 21,989 396,771
Abstain: 1,290 2,072 35,842
Broker
Non-Vote: 12,820 395 41,369
* Amend the fundamental investment limitation concerning lending.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,280,990 1,337,608 7,671,068
Against: 16,862 21,989 385,226
Abstain: 1,290 2,072 36,097
Broker
Non-Vote: 12,820 395 41,369
* Amend the fundamental investment limitation concerning concentration of
investments in a particular industry.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,277,455 1,341,466 7,679,494
Against: 19,285 18,131 382,346
Abstain: 2,402 2,072 30,551
Broker
Non-Vote: 12,820 395 41,369
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,278,567 1,341,466 7,673,963
Against: 19,285 18,131 383,220
Abstain: 1,290 2,072 35,208
Broker
Non-Vote: 12,820 395 41,369
* Eliminate the fundamental limitation concerning investment in other
investment companies.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,279,878 1,341,466 7,690,300
Against: 16,862 18,131 365,935
Abstain: 2,402 2,072 36,156
Broker
Non-Vote: 12,820 395 41,369
* Amend the fundamental investment limitation concerning investments in real
estate.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,279,878 1,341,527 7,708,189
Against: 16,862 18,070 349,987
Abstain: 2,402 2,072 34,215
Broker
Non-Vote: 12,820 395 41,369
* Amend the fundamental investment limitation concerning underwriting.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,280,990 1,341,772 7,695,951
Against: 16,862 17,825 361,944
Abstain: 1,290 2,072 34,496
Broker
Non-Vote: 12,820 395 41,369
ANNUAL REPORT PROXY VOTING RESULTS 35
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning commodities.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,279,878 1,337,560 7,687,417
Against: 16,862 22,037 370,848
Abstain: 2,402 2,072 34,126
Broker
Non-Vote: 12,820 395 41,369
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,279,878 1,341,466 7,675,904
Against: 16,862 18,131 381,735
Abstain: 2,402 2,072 34,752
Broker
Non-Vote: 12,820 395 41,369
* Eliminate the fundamental limitation concerning short sales.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,277,455 1,341,221 7,669,753
Against: 19,285 18,376 387,534
Abstain: 2,402 2,072 35,104
Broker
Non-Vote: 12,820 395 41,369
* Eliminate the fundamental investment limitation concerning margin purchases
of securities.
LIMITED- INTERMEDIATE- BENHAM
TERM TERM BOND
For: 1,277,455 1,341,466 7,671,413
Against: 19,285 18,131 385,945
Abstain: 2,402 2,072 35,033
Broker
Non-Vote: 12,820 395 41,369
36 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
SHARE CLASS AND RETIREMENT ACCOUNT
INFORMATION
SHARE CLASSES
Until September 3, 1996, the Limited-Term, Intermediate-Term and Benham Bond
funds issued one class of fund shares, reflecting the fact that most investors
bought their shares directly from American Century. All investors paid the same
annual unified management fee and did not pay any commissions or other fees to
purchase shares from American Century.
Now more share purchases are made by investors through financial
intermediaries (who ordinarily are compensated for the additional services they
provide). In September 1996, American Century began to offer two classes of
shares for the Limited-Term, Intermediate-Term and Benham Bond funds. One class
is for investors who buy directly from American Century, the other is for
investors who buy through financial intermediaries.
The original class of shares is called the INVESTOR CLASS. All shares issued
and outstanding before September 3, 1996, have been designated as Investor Class
shares. Investor Class shares may also be purchased after September 3, 1996.
Investor Class shareholders do not pay any commissions or other fees for
purchase of fund shares directly from American Century. Investors who buy
Investor Class shares through a broker-dealer may be required to pay the
broker-dealer a transaction fee. THE PRICE AND PERFORMANCE OF THE INVESTOR CLASS
SHARES ARE LISTED IN NEWSPAPERS. NO OTHER CLASS IS CURRENTLY LISTED.
In addition, there is an ADVISOR CLASS, which is sold through banks,
broker-dealers, insurance companies and financial advisors. Advisor Class shares
are subject to a 0.50% Rule 12b-1 service and distribution fee. Half of that fee
is available to pay for recordkeeping and administrative services, and half is
available to pay for distribution services provided by the financial
intermediary through which the Advisor Class shares are purchased. The total
expense ratio of the Advisor Class is 0.25% higher than the total expense ratio
of the Investor Class.
The Advisor Class had not commenced as of October 31, 1997, for Limited-Term
Bond.
Both classes of shares represent a pro rata interest in the funds and
generally have the same rights and preferences.
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
ANNUAL REPORT SHARE CLASS AND RETIREMENT ACCOUNT INFORMATION 37
NOTES
38 NOTES AMERICAN CENTURY INVESTMENTS
NOTES
ANNUAL REPORT NOTES 39
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY & POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies:
LIMITED-TERM BOND is a variable-price bond fund that seeks to provide
interest income by investing in a diversified portfolio of fixed-income
securities. The fund maintains a weighted average maturity of five years or
less.
INTERMEDIATE-TERM BOND is a variable-price bond fund that seeks to provide
interest income by investing in a diversified portfolio of fixed-income
securities. The fund maintains a weighted average maturity of 3-10 years.
BENHAM BOND is a variable-price bond fund that seeks to provide interest
income by investing in a diversified portfolio of fixed-income securities. The
fund has no weighted average maturity limitations, but the fund typically
invests in intermediate- and long-term bonds.
COMPARATIVE INDICES
The indices listed are used in the report for fund performance comparisons.
They are not investment products available for purchase.
The MERRILL LYNCH 1- TO 5 -YEAR GOVERNMENT/ CORPORATE INDEX is an index
composed of corporate and Treasury debt with an overall maturity of
approximately three years. The index consists of approximately 24% corporate
debt and 76% government debt. The corporate debt issues are rated BBB or better
by Standard & Poor's.
The LEHMAN INTERMEDIATE GOVERNMENT/ CORPORATE INDEX includes the Lehman
Government Index and the Lehman Intermediate Corporate Bond Index, which reflect
the price fluctuations of U.S. Treasury and government agency securities,
corporate bonds and Yankee bonds with maturities of 1-10 years.
The LEHMAN AGGREGATE BOND INDEX is composed of the Lehman
Government/Corporate Index and the Lehman Mortgage-Backed Securities Index. It
reflects the price fluctuations of Treasury securities, U.S. government agency
securities, corporate bond issues and mortgage-backed securities.
LIPPER RANKINGS
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking
service that groups funds according to their investment objectives. Rankings are
based on average annual returns for each fund in a given category for the
periods indicated. Rankings are not included for periods less than one year.
The Lipper categories for the Diversified Bond funds are:
SHORT INVESTMENT-GRADE DEBT FUNDS (Limited-Term Bond)--funds with
dollar-weighted average maturities of five years or less that invest at least
65% of their assets in investment-grade debt.
INTERMEDIATE INVESTMENT-GRADE DEBT FUNDS (Intermediate-Term Bond)-- funds
with dollar-weighted average maturities of 5-10 years that invest at least 65%
of their assets in investment-grade debt.
A-RATED CORPORATE DEBT FUNDS (Benham Bond)--funds that invest at least 65%
of their assets in government issues or corporate debt issues rated A or better.
INVESTMENT TEAM LEADERS
Portfolio Managers Bud Hoops
Jeff Houston
Credit Research Manager Greg Afiesh
40 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
* AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year returns, please refer to the "Financial
Highlights" on pages 30-32.
YIELDS
* 30-DAY SEC YIELD represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES--the number of different securities held by a fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* AVERAGE DURATION--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio. As the
duration of a portfolio increases, so does the impact of a change in interest
rates on the value of the portfolio.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF FIXED-INCOME SECURITIES
* CORPORATE BONDS--debt securities or instruments issued by companies and
corporations. Short-term corporate securities are tyically issued to raise cash
and cover current expenses in anticipation of future revenues; long-term
corporate securities are issued to finance capital expenditures, such as new
plant construction or equipment purchases.
* FOREIGN GOVERNMENT SECURITIES--debt securities issued or guaranteed by foreign
governments or their political subdivisions. Some of these securities are direct
obligations of the issuing government; others are backed by some form of
government sponsorship.
* MORTGAGE-BACKED SECURITIES--debt securities that represent ownership in pools
of mortgage loans. Most mortgage-backed securities are structured as
"pass-throughs"--the monthly payments of principal and interest on the mortgages
in the pool are collected by the bank that is servicing the mortgages and are
"passed through" to investors. While the payments of principal and interest are
considered secure (many are backed by government agency guarantees), the cash
flow is less certain than in other fixed-income investments. Mortgages that are
paid off early reduce future interest payments from the pool.
* U.S. GOVERNMENT AGENCY SECURITIES--debt securities issued by U.S. government
agencies (such as the Federal Home Loan Bank and the Federal Farm Credit Bank).
Government agency securities include discount notes (maturing in one year or
less) and medium-term notes, debentures and bonds (maturing in three months to
50 years).
* U.S. TREASURY SECURITIES--debt securities issued by the U.S. Treasury and
backed by the direct "full faith and credit" pledge of the U.S. government.
Treasury securities include bills (maturing in one year or less), notes
(maturing in two to 10 years) and bonds (maturing in more than 10 years).
ANNUAL REPORT GLOSSARY 41
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AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
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<PAGE>
ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
TWENTIETH
CENTURY
GROUP
New Opportunities
TABLE OF CONTENTS
Report Highlights ......................................................... 1
Our Message to You ........................................................ 2
Market Perspective ........................................................ 3
Performance & Portfolio Information ....................................... 4
Management Q & A .......................................................... 5
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statement of Changes in Net Assets ........................................ 12
Notes to Financial Statements ............................................. 13
Financial Highlights ...................................................... 15
Independent Auditors' Report .............................................. 16
Proxy Voting Results ...................................................... 17
Retirement Account Information ............................................ 19
Background Information
Investment Philosophy and Policies ............................. 20
Comparative Indices ............................................ 20
Investment Team Leaders ........................................ 20
Glossary .................................................................. 21
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
New Opportunities
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* Returns in the U.S. stock market were strong across capitalization ranges,
with the stocks of large- and medium-sized companies posting the best gains
and small-cap stocks not far behind.
* The S&P 500's total return for the year ended October 31, 1997, was 32.10%,
compared to 32.67% for the S&P MidCap 400 and 29.33% for the Russell 2000.
* The strong gains were attributable to the continuing U.S. economic
expansion, which is the third longest since World War II. Although the
market indices had a strong showing, the ride was not smooth.
* Gains for small- and mid-cap stocks surpassed large-cap returns in August,
following earnings disappointments by several multinational consumer
companies.
* Stocks of all sizes faltered in October, as the market reacted to turmoil in
southeast Asian markets.
NEW OPPORTUNITIES
* New Opportunities regained ground lost in its early months to post a 6.20%
total return for the 10 months from its inception to October 31, 1997. The
fund had an impressive 32.75% return during the final six months of the
period, as small- and medium-capitalization stocks recovered sharply.
However, that performance was offset by the fund's losses from its inception
through April 30, 1997.
* The fund's top performing stocks came from a variety of industries. At the
top of the list was Sipex Corp., which makes semiconductor chips that light
up wristwatch displays.
* Datum Inc., a supplier to wireless communications companies, was the fund's
hardest hit stock during the final six months of the fiscal year. The
company suffered from uncertainty over future demand from its principal
customer.
* Holdings in environmental services increased as our management team
recognized trends of consolidation and improved efficiency that are
benefiting these stocks.
* Our fund managers are finding many attractive growth stocks to choose from
in a number of industries. The fund's top 10 holdings at October 31 included
a turf seed company, a pasta manufacturer and a contact lens maker.
NEW OPPORTUNITIES
TOTAL RETURNS: AS OF 10/31/97
6 Months 32.75%*
Since Inception 6.20%*
NET ASSETS: $231 million
(AS OF 10/31/97)
INCEPTION DATE: 12/26/96
TICKER SYMBOL: TWNOX
*Not annualized.
Many of the investment terms in this report are defined in the Glossary on page
21.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[James E. Stowers, Jr. and James E. Stowers III photo]
The stock market's bull run continued in 1997, although there were a few
stumbles. In August, several widely-held companies announced earnings
disappointments and, in October, currency devaluations in southeast Asia rumbled
through markets worldwide. The U.S. market rebounded after each period of
turbulence, as the underlying strength of the economy supported a continued
advance in stock prices. Despite fallout from Asian markets, there are many
reasons to believe strong stock performance will continue. Fundamental
indicators of the U.S. economy's health remain solid, providing an environment
for companies to build earnings while surrendering only a small percentage of
their gains to inflation.
Not all investors participated equally in the market's performance. Our
funds that invest in the stocks of small and mid-sized companies had a
disappointing fiscal year. We have increased our focus on these funds to provide
additional staffing and other resources the team needs to achieve improved
returns. We are not satisfied with results of the past year and are committed to
doing better.
In 1998, American Century will enter its 40th year, a landmark few mutual fund
companies can claim. During the 1990s, we have broadened our range of investment
choices dramatically. Today, American Century offers nearly 70 funds, enabling
us to meet a wide array of investor objectives.
The company's tradition of creating new opportunities for investors
continued in July, when we announced that J.P. Morgan had agreed to become a
significant minority shareholder in American Century. For more than 150 years,
J.P. Morgan has served institutions, governments and individuals with complex
financial needs. Within the framework of this proposed relationship, American
Century will continue to operate as an independent company. Our corporate
management team will remain the same, and the Stowers family will retain voting
control of the company. This proposed business partnership will allow us to
expand and enhance the investment services we provide investors.
These are interesting times to be in the mutual fund industry, whether as an
investor or a CEO. Some analysts see inflation on the horizon. Others see
deflation, as global competition forces prices downward. Meanwhile, investors
enjoy new choices when investing for retirement, including the expanded
opportunities provided by the Taxpayer Relief Act of 1997. Whatever your needs
or outlook, we hope you will give us an opportunity to help you reach your
financial goals.
Sincerely,
/s/James E. Stowers, Jr. /s/James E. Stowers III
James E. Stowers, Jr. James E. Stowers III
Chairman of the Board and Founder Chief Executive Officer
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
THE YEAR IN REVIEW
On October 31, 1997, the U.S. economic expansion completed its eightieth
month, making it the third longest since World War II. A 106-month-long period
of sustained economic growth in the 1960s is the record holder, followed by a
92-month spell in the 1980s. What differentiates the recent expansion from
earlier ones is low inflation, with an average annual rate of just over 2%
during the decade and just 1.8% for the 10 months of 1997. Wage pressure, a key
component of inflation, has yet to materialize despite the lowest unemployment
rates since the early 1970s. U.S. corporations have used restructurings and
technological advances to increase productivity more rapidly than the demand for
labor. In the absence of inflationary pressure, interest rates have been low,
reducing corporate borrowing costs. As a result, profit margins are at their
highest levels since 1969 and the economy has benefited greatly. It grew at a
torrid annual pace of 4.9% in the first quarter of 1997, the strongest quarter
in more than nine years. Growth in the second and third quarters remained
strong, at annual rates of 3.3% each quarter.
THE MARKETS
The stock market reflected this period of economic growth, with all sectors
showing robust returns. The chart above captures the market's climb during the
year ended October 31, 1997. Although the indices had a strong showing, the ride
was not smooth, with unusually high levels of volatility and volumes of shares
traded setting records in August and October. Whereas the S&P 500 was far ahead
of the other indices at April 30, 1997, the gap had closed six months later.
A handful of large, multinational stocks continued their two-year dominance of
the market until August, when Coca-Cola and Gillette announced earnings
disappointments. Other large companies followed with similar announcements,
leading to an abrupt halt in the market's relentless upward march and the
outperformance of large stocks. The S&P 500 Index was down 5.8% for the month of
August.
Stock prices resumed their upward move in September; however, the gains of
small- and mid-cap stocks exceeded those of large caps. October saw another
reversal as the market reacted to news of currency devaluations across southeast
Asia. Those devaluations sent market indices plummeting in such emerging markets
as Thailand, Malaysia and Singapore. U.S. investors started paying attention
when the panic selling reached Hong Kong and European markets. The S&P 500
dropped 3.45% in October, the S&P MidCap 400 dropped 4.35% and the Russell 2000
fell 4.39% amid fears that the sell-off overseas would translate into reduced
corporate profits for U.S. multinational companies in 1998.
The relative outperformance of medium- and small-cap stocks later in the
year resulted from several factors. These companies' profits are not as
dependent on foreign trade as the profits of larger companies; small companies
were not tainted by the earnings disappointments that hurt the large-cap sector
over the summer; and small-cap prices had reached very attractive levels
relative to earnings, positioning them for a strong rebound.
[line graph - data below]
U.S. Stock Market Performance
Growth of $1.00 for the year ended October 31, 1997
S&P 500 S&P 400 Russell 2000
10/31/96 $1.00 $1.00 $1.00
11/30/96 $1.07 $1.06 $1.04
12/31/96 $1.06 $1.06 $1.07
1/31/97 $1.12 $1.10 $1.09
2/28/97 $1.13 $1.09 $1.06
3/31/97 $1.08 $1.04 $1.01
4/30/97 $1.15 $1.07 $1.02
5/31/97 $1.21 $1.16 $1.13
6/30/97 $1.27 $1.20 $1.18
7/31/97 $1.37 $1.31 $1.23
8/31/97 $1.29 $1.31 $1.26
9/30/97 $1.37 $1.39 $1.35
10/31/97 $1.32 $1.33 $1.29
Comparative One-Year Returns for the year ended October 31, 1997
S&P 500 ............ 32.10%
S&P MidCap 400 ..... 32.67%
Russell 2000 ....... 29.33%
SOURCE: LIPPER ANALYTICAL SERVICES, INC.
ANNUAL REPORT MARKET PERSPECTIVE 3
PERFORMANCE & PORTFOLIO INFORMATION
TOTAL RETURNS AS OF OCTOBER 31,1997(1)
6 MONTHS LIFE OF FUND(2)
- --------------------------------------------------------------------------------
New Opportunities ................................ 32.75% 6.20%
Russell 2000 Growth .............................. 30.70% 15.55%(3)
- ----------
(1) Not Annualized.
(2) Inception was December 26, 1996.
(3) Return since 12/31/96, the date nearest the fund's inception for which data
are available.
Seepages 20 and 21 for more information about the Russell 2000 Growth Index and
returns.
[line graph - data below]
GROWTH OF $10,000 OVER THE LIFE OF THE FUND
NEW OPP RUSSELL 2000 GROWTH
12/31/96 $10,000 $10,000
1/31/97 $9,745 $10,242
2/28/97 $8,762 $9,623
3/31/97 $7,957 $8,944
4/30/97 $7,859 $8,841
5/31/97 $9,293 $10,169
6/30/97 $9,961 $10,514
7/31/97 $10,845 $11,053
8/31/97 $10,943 $11,385
9/30/97 $11,709 $12,293
10/31/97 $10,432 $11,555
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing New Opportunities' total return includes operating
expenses (such as transaction costs and management fees) that reduce returns,
while the total return line of the Russell 2000 Growth Index does not.
PORTFOLIO AT A GLANCE
10/31/97 4/30/97
Number of Companies 64 68
Median Price/Earnings Ratio 28.5 27.9
Portfolio Turnover 118%(1) 40%(2)
Expense Ratio 1.49%(3) 1.50%(3)
(1) For the period from 12/26/96 to 10/31/97.
(2) For the period from 12/26/96 to 4/30/97.
(3) Annualized.
4 PERFORMANCE & PORTFOLIO INFORMATION AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
An interview with Glenn Fogle and John Seitzer, portfolio managers on the
New Opportunities investment team.
How did the fund perform from its inception on December 26, 1996, until October
31?
New Opportunities regained ground lost in its early months to post a 6.20%
total return. The fund's benchmark, the Russell 2000 Growth Index, returned
15.55%. The fund had an impressive 32.75% return during the final six months of
the period, when its benchmark returned 30.70%. However, the fund's performance
was offset by its earlier losses.
Price volatility is a fact of life among smaller stocks. Still, this year
was exceptional. In the first half of the period, large-cap stocks outperformed
the stocks of smaller companies by a wide margin. In addition, performance was
restricted to a fairly small group of stocks in each capitalization category. In
the second half, the stocks of smaller companies rebounded sharply. The fund
outperformed its benchmark as investors regained confidence in the high growth
companies in which New Opportunities invests.
What attracted investors to mid- and small-cap growth stocks?
Two things seemed responsible. Several high profile, large-cap companies,
including Coca-Cola and Gillette, announced disappointing earnings for the
second quarter. This gave investors a heads-up that even large, global consumer
franchises can stumble. Secondly, investors started to regain confidence in the
earnings prospects of the high growth companies we buy. The first few months
after the fund opened were frustrating for us because, although many of our
holdings met very high earnings expectations, investors doubted that such growth
could continue. As these companies continued to hit earnings targets, investors
became more willing to pay the premium that high growth companies normally
command, especially since the premium had fallen over the past year.
How did you respond to the market's 7.18% drop on October 27?
We checked on each of our holdings to see if there were any reason to doubt
our confidence in their business prospects, and we added to holdings that had
dropped to very attractive prices. We saw no reason to join a market move driven
by psychological fears rather than economic factors.
What stocks or sectors added most to returns during the final six months of the
fiscal year?
The fund's top performing stocks came from a variety of industries. At the
top of the list was Sipex Corp., which makes semiconductor chips that light up
wristwatch displays. These highly efficient chips require less battery power to
illuminate a display than those produced by competitors. A growing universe of
cellular phone and pager applications are driving the stock's performance.
Another large contributor to fund performance was Trico Marine Services, Inc., a
company that operates supply boats to support offshore drillers. New technology
is enabling oil and gas companies to more accurately find, and more efficiently
extract, oil and gas reserves. Our holdings included firms that supply energy
companies with both land rigs and offshore rigs, as well as boats to service
offshore operations. The number of drilling rigs is down by half compared to 10
years ago and the cost and time to build new equipment is significant, giving
tremendous pricing power to rig service companies. By the end of October, our
holdings in this category decreased as we found more attractive opportunities
elsewhere.
Among our other top performers was Computer Learning Centers, which designs
and administers year-long information technology training programs. Eighty
percent of the students who enroll do not have college degrees and are seeking
training to further their job prospects. The schools boast an 85% placement
rate.
ANNUAL REPORT MANAGEMENT Q&A 5
MANAGEMENT Q&A
What stocks or sectors detracted from fund performance?
Datum Inc., a supplier to wireless communications companies, was our hardest
hit stock during the final six months of the fiscal year. The company makes an
atomic clock, which is used to coordinate the transmission of digital packets of
data. The stock suffered from uncertainty over future demand from Datum's
principal customer. Spine-Tech Inc. was another disappointment. It makes a
fusion cage, which can be inserted in the lower spine and acts as a cushion for
those suffering from degenerative disc disease. The cage is cheaper, faster and
more effective than the metal screws used most commonly today. Spine-Tech's
stock was impacted by concerns that an orthopedic supplier may introduce a
competing product sooner than expected.
What changes did you make in the fund's investment strategy or holdings?
The fund's holdings in biotechnology and pharmaceutical stocks have
declined. We loaded up on these stocks after they were hit by a wave of what we
believe was indiscriminate selling in April. As small- and mid-cap stocks
regained favor with investors over the summer, we sold some of these holdings to
buy companies that we felt had more sustainable earnings acceleration prospects,
such as Connector Managed Care. This firm provides services to insurance
companies and corporations to help reduce the cost of workers compensation
insurance.
Environmental services is an industry in which we are seeing acceleration
trends and have increased holdings. There is a rapid move toward consolidation
and we have purchased a few small waste companies that are aggressively growing
by acquisition. The industry still includes over 5,900 private, small-scale
operators that are ripe for acquisition. The larger public companies are able to
acquire smaller companies and operate them more profitably by consolidating
back-office functions and using landfill space more efficiently.
Our weighting in machinery and equipment also increased. One example is
Discreet Logic, which makes non-linear video editing
TOP TEN HOLDINGS % of fund investments
As of As of
10/31/97 4/30/97
Helen of Troy Ltd. 2.8% 2.3%
Sipex Corp. 2.8% 1.6%
Rainforest Cafe, Inc. 2.7% 1.7%
Pinnacle Systems, Inc. 2.5% -
Trico Marine Services, Inc. 2.5% 1.5%
Kos Pharmaceuticals, Inc. 2.5% 2.0%
Wesley Jessen VisionCare, Inc. 2.4% -
American Italian Pasta Co. Cl A 2.1% -
Wackenhut Corrections Corp. 2.0% -
Concentra Managed Care, Inc. 1.9% 1.2%*
TOP FIVE INDUSTRIES % of fund investments
As of As of
10/31/97 4/30/97
Electrical & Electronic
Components 13.6% 9.1%
Machinery & Equipment 10.6% 7.1%
Computer Software & Services 8.6% 8.8%
Energy (Services) 5.7% 6.9%
Environmental Services 4.9% 2.8%
*Represents CRA Managed Care, Inc., which merged with Occusystems, Inc. to
form Concentra Managed Care, Inc. effective 9/2/97.
6 MANAGEMENT Q&A AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
equipment used to create special effects in feature films such as Jurassic Park.
The demand for special effects in films is increasing and Discreet dominates the
high-end segment of the market.
It should be noted that the investment managers of New Opportunities use a
bottoms-up approach for constructing the portfolio. We do not strategically
adjust our industry weighings in response to our opinion of where the economy is
headed. Our bottoms-up approach has led to a very diversified set of companies,
including a turf seed company, a pasta manufacturer and a contact lens maker.
However, we may encounter a company whose earnings growth is driven by industry
factors, which then points us toward other companies in the same industry. This
was the case with environmental services.
DO YOU SEE THE SHIFT TOWARD SMALL- AND MID-CAP STOCKS CONTINUING?
The market is not yet in love with small- and mid-cap growth stocks, but it
no longer hates them. In other words, from October, 1996, through March, 1997,
investors seemed bent on reducing their exposure to smaller stocks. The selling
pressure caused these stocks to badly trail large-cap indices. More recently,
the market's narrow preference for large-cap stocks has broadened to include the
rest of the market, which is an improvement but hardly a major shift in
sentiment. However, if the large-cap stocks that have led the market for three
years continue to see slowing earnings growth rates, we would expect investors
to become more interested in smaller stocks with more robust earnings growth.
ANNUAL REPORT MANAGEMENT Q&A 7
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
COMMON STOCKS
AEROSPACE & DEFENSE--1.0%
70,000 Triumph Group, Inc.(1) $ 2,275
-------------
AGRICULTURE--1.5%
355,200 AgriBioTech, Inc.(1) 3,530
-------------
AUTOMOBILES & AUTO PARTS--1.4%
80,000 Tower Automotive, Inc.(1) 3,350
-------------
BIOTECHNOLOGY--4.0%
65,400 Agouron Pharmaceuticals, Inc.(1) 2,979
70,000 PAREXEL International Corp.(1) 2,520
65,000 PathoGenesis Corp.(1) 2,320
58,700 Sangstat Medical Corp.(1) 1,809
-------------
9,628
-------------
BUSINESS SERVICES & SUPPLIES--2.3%
15,000 NCO Group, Inc.(1) 540
169,700 Wackenhut Corrections Corp.(1) 4,879
-------------
5,419
-------------
COMMUNICATIONS EQUIPMENT--3.8%
131,000 Boston Technology, Inc.(1) 3,553
70,000 Davox Corp.(1) 2,494
65,000 NICE-Systems Ltd. ADR(1) 3,047
-------------
9,094
-------------
COMMUNICATIONS SERVICES--1.7%
170,000 RSL Communications, Ltd. Cl A(1) 3,984
-------------
COMPUTER SOFTWARE & SERVICES--8.6%
175,000 Aris Corp.(1) 4,156
137,000 Cerner Corp.(1) 3,313
120,000 JDA Software Group, Inc.(1) 3,743
6,900 Mastech Corp.(1) 230
150,000 Radiant Systems, Inc.(1) 2,747
100,000 Superior Consultant Holdings Corp.(1) 3,106
81,750 Veritas Software Corp.(1) 3,403
-------------
20,698
-------------
CONSUMER PRODUCTS--4.1%
200,000 Enamelon, Inc.(1) 3,100
401,800 Helen of Troy Ltd.(1) 6,755
-------------
9,855
-------------
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
CONTROL & MEASUREMENT--2.6%
129,100 Molecular Dynamics, Inc.(1) $ 2,985
235,000 Robotic Vision Systems, Inc.(1) 3,276
------------
6,261
------------
EDUCATION--0.9%
48,000 Computer Learning Centers, Inc.(1) 2,184
------------
ELECTRICAL & ELECTRONIC
COMPONENTS--13.6%
95,000 ANADIGICS, Inc.(1) 3,509
240,000 Box Hill Systems Corp.(1) 3,720
100,000 Burr-Brown Corp.(1) 3,006
42,800 Jabil Circuit, Inc.(1) 1,934
115,000 Qlogic Corp.(1) 3,709
136,500 REMEC, Inc.(1) 3,438
45,500 Sanmina Corp.(1) 3,401
200,000 Sipex Corp.(1) 6,738
68,200 Vitesse Semiconductor Corp.(1) 2,962
------------
32,417
------------
ENERGY (SERVICES)--5.7%
99,600 Hvide Marine, Inc.(1) 3,281
170,000 Input/Output, Inc.(1) 4,558
160,000 Trico Marine Services, Inc.(1) 5,900
------------
13,739
------------
ENVIRONMENTAL SERVICES--4.9%
118,300 American Disposal Services, Inc.(1) 4,141
125,600 Eastern Environmental Services, Inc.(1) 3,171
168,500 Superior Services Inc.(1) 4,476
------------
11,788
------------
FOOD & BEVERAGE--3.2%
235,000 American Italian Pasta Co. Cl A(1) 4,935
172,600 Northland Cranberries, Inc. 2,675
------------
7,610
------------
HEALTHCARE--2.8%
120,000 Advanced Health Corp.(1) 2,115
141,451 Concentra Managed Care, Inc.(1) 4,606
------------
6,721
------------
LEISURE--1.3%
135,000 Vistana, Inc.(1) 3,063
------------
See Notes to Financial Statements
8 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Shares ($ in Thousands) Value
- --------------------------------------------------------------------------------
MACHINERY & EQUIPMENT--10.6%
68,900 Applied Power Inc. $ 4,263
200,000 Discreet Logic Inc.(1) 3,913
60,000 Hanover Compressor Company(1) 1,298
230,000 OmniQuip International, Inc. 3,781
230,000 Pinnacle Systems, Inc.(1) 6,095
110,000 Rental Service Corp.(1) 2,943
74,300 Veeco Instruments Inc.(1) 2,944
----------------
25,237
----------------
MEDICAL EQUIPMENT & SUPPLIES--4.4%
90,000 Cyberonics, Inc.(1) 1,215
112,000 Spine-Tech, Inc.(1) 3,479
200,000 Wesley Jessen VisionCare, Inc.(1) 5,800
----------------
10,494
----------------
PHARMACEUTICALS--2.5%
165,000 Kos Pharmaceuticals, Inc.(1) 5,888
----------------
RESTAURANTS--3.3%
50,700 Fine Host Corp.(1) 1,401
188,900 Rainforest Cafe, Inc.(1) 6,434
----------------
7,835
----------------
RETAIL (APPAREL)--2.5%
250,000 Children's Place Retail
Stores, Inc. (The)(1) 1,508
185,000 DM Management Co.(1) 2,792
140,800 Genesco Inc.(1) 1,786
----------------
6,086
----------------
RETAIL (GENERAL MERCHANDISE)--1.7%
188,000 Fred's, Inc. 4,148
----------------
RETAIL (SPECIALTY)--1.8%
168,400 Action Performance Cos. Inc.(1) 4,294
----------------
RUBBER & PLASTICS--1.5%
155,000 Peak International Ltd.(1) 3,613
----------------
TOTAL COMMON STOCKS--91.7% 219,211
(Cost $192,518) ----------------
Shares/Principal Amount ($ in Thousands) Value
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS(2)
$6,700 par value FHLB Discount
Notes, 5.50%, 11/3/97 $ 6,700
1,800,000 Units of Participation in Chase
Vista U.S. Government Money Market Fund
(Institutional Shares), 5.37%, 11/3/97 1,800
Repurchase Agreement, Merrill Lynch & Co. Inc.,
(U.S. Treasury obligations), in a joint
trading account at 5.60%, dated 10/31/97,
due 11/3/97 (Delivery value $11,405) 11,400
-----------------------
TOTAL TEMPORARY CASH INVESTMENTS--8.3% 19,900
(Cost $19,898) -----------------------
TOTAL INVESTMENT SECURITIES--100.0% $239,111
(Cost $212,416) =======================
NOTES TO SCHEDULE OF INVESTMENTS
FHLB = Federal Home Loan Bank
(1) Non-income producing.
(2) The rates for U.S. Government Agency discount notes are the yield at
purchase.
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 9
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
($ and Shares in Thousands Except Per Share Amount)
ASSETS
Investment securities, at value
(identified cost of $212,416) (Note 3) ..................... $ 239,111
Cash .......................................................... 155
Receivable for investments sold ............................... 2,470
Dividends and interest receivable ............................. 12
---------
241,748
---------
LIABILITIES
Disbursements in excess of demand deposit cash ................ 253
Payable for investments purchased ............................. 9,901
Payable for capital shares redeemed ........................... 12
Accrued management fees (Note 2) .............................. 316
---------
10,482
---------
Net Assets .................................................... $ 231,266
=========
CAPITAL SHARES, $0.01 PAR VALUE
Authorized .................................................... 100,000
=========
Outstanding ................................................... 43,529
=========
Net Asset Value Per Share ..................................... $ 5.31
=========
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ....................... $ 208,322
Accumulated undistributed net realized
loss from investment transactions ............................. (3,751)
Net unrealized appreciation on investments (Note 3) ........... 26,695
---------
$ 231,266
=========
See Notes to Financial Statements
10 STATEMENT OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
STATEMENT OF OPERATIONS
December 26, 1996 (Inception) Through October 31, 1997
INVESTMENT INCOME ($ In Thousands)
Income:
Interest ....................................................... $ 532
Dividends ...................................................... 52
--------
584
--------
Expenses (Note 2):
Management fees ................................................ 2,151
Directors' fees and expenses ................................... 1
--------
2,152
--------
Net investment loss ............................................ (1,568)
--------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized loss on investments ............................... (3,751)
Change in net unrealized appreciation on investments ........... 26,695
--------
Net realized and unrealized gain on investments ................ 22,944
--------
Net Increase in Net Assets
Resulting from Operations ...................................... $ 21,376
========
See Notes to Financial Statements
ANNUAL REPORT STATEMENT OF OPERATIONS 11
STATEMENT OF CHANGES IN NET ASSETS
DECEMBER 26, 1996 (INCEPTION) THROUGH
OCTOBER 31, 1997
Increase in Net Assets
OPERATIONS
Net investment loss ............................................. $ (1,568)
Net realized loss on investments ................................ (3,751)
Change in net unrealized appreciation on investments ............ 26,695
---------
Net increase in net assets resulting from operations ............ 21,376
---------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ....................................... 220,830
Payments for shares redeemed .................................... (10,940)
---------
Net increase in net assets from capital share transactions ...... 209,890
---------
Net increase in net assets ...................................... 231,266
NET ASSETS
Beginning of period ............................................. --
---------
End of period ................................................... $ 231,266
=========
TRANSACTIONS IN SHARES OF THE FUND
Sold ............................................................ 45,726
Redeemed ........................................................ (2,197)
---------
Net increase .................................................... 43,529
=========
See Notes to Financial Statements
12 STATEMENT OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Twentieth Century New
Opportunities Fund (the Fund) is one of the thirteen series of funds issued by
the Corporation. The Fund's investment objective is to seek capital growth by
investing primarily in common stocks that are considered by management to have
better-than-average prospects for appreciation. The following significant
accounting policies related to the Fund are in accordance with accounting
policies generally accepted in the investment company industry.
SECURITY VALUATIONS--Portfolio securities traded primarily on a principal
securities exchange are valued at the last reported sales price, or the mean of
the latest bid and asked prices where no last sales price is available.
Securities traded over-the-counter are valued at the mean of the latest bid and
asked prices or, in the case of certain foreign securities, at the last reported
sales price, depending on local convention or regulation. Debt securities not
traded on a principal securities exchange are valued through valuations obtained
from a commercial pricing service or at the mean of the most recent bid and
asked prices. When valuations are not readily available, securities are valued
at fair value as determined in accordance with procedures adopted by the Board
of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Dividend income less foreign taxes withheld (if any) is
recorded as of the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of discounts and accretion of premiums.
FOREIGN CURRENCY TRANSACTIONS--The accounting records of the Fund are
maintained in U. S. dollars. All assets and liabilities initially expressed in
foreign currencies are converted into U. S. dollars at prevailing exchange
rates. Purchases and sales of investment securities, dividend and interest
income, and certain expenses are translated at the rates of exchange prevailing
on the respective dates of such transactions.
Net realized foreign currency exchange gains or losses arise from sales of
foreign currencies and the difference between asset and liability amounts
initially stated in foreign currencies and the U. S. dollar value of the amounts
actually received or paid. Net unrealized foreign currency exchange gains or
losses arise from changes in the value of assets and liabilities, other than
portfolio securities, resulting from changes in the exchange rates.
Net realized and unrealized foreign currency exchange gains or losses
occurring during the holding period of portfolio securities are a component of
realized gain (loss) on investments and unrealized appreciation (depreciation)
on investments, respectively. During the period ended October 31, 1997, the Fund
did not hold any securities denominated in foreign currencies. Therefore, there
were no realized or unrealized foreign currency exchange gains or losses for the
period.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS--The Fund may enter into forward
foreign currency exchange contracts for the purpose of settling specific
purchases or sales of securities denominated in a foreign currency or to hedge
the Fund's exposure to foreign currency exchange rate fluctuations. When
required, the Fund will segregate assets in an amount sufficient to cover its
obligations under the hedge contracts. The net U. S. dollar value of foreign
currency underlying all contractual commitments held by the Fund and the
resulting unrealized appreciation or depreciation are determined daily using
prevailing exchange rates. Forward contracts involve elements of risk in excess
of the amount reflected in the Statement of Assets and Liabilities. The Fund
bears the risk of an unfavorable change in the foreign currency exchange rate
underlying the forward contract. Additionally, losses may arise if the
counterparties do not perform under the contract terms. There were no open
forward foreign currency exchange contracts at October 31, 1997.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the Board of Directors. Each repurchase agreement is recorded at
cost. The Fund requires that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
Fund to obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the value of the securities
transferred to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is equal to or greater than amounts
owed to the Fund under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U. S.
Treasury or Agency obligations.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 13
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
INCOME TAX STATUS--It is the policy of the Fund to distribute all taxable
income and capital gains to shareholders and to otherwise qualify as a regulated
investment company under provisions of the Internal Revenue Code. Accordingly,
no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions to shareholders are recorded on
the ex-dividend date. Distributions from net investment income and net realized
gains are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized gains may differ from their ultimate characterization for
federal income tax purposes. These differences are due to differences in the
recognition of income and expense items for financial statement and tax
purposes.
At October 31, 1997, accumulated net realized capital loss carryovers of
$3,542,313 (expiring 2005) may be used to offset future taxable gains.
ADDITIONAL INFORMATION--Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc., and the Corporation's transfer agent, American Century Services
Corporation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee. The Agreement provides that all expenses
of the Fund, except brokerage commissions, taxes, interest, expenses of those
directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will be paid by ACIM. The fee is computed daily and paid monthly based
on the Fund's average daily closing net assets during the previous month. The
annual management fee is 1.50%.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of investment securities, excluding short-term investments, for
the period December 26, 1996 (inception) through October 31, 1997, totaled
$383,709,772. Sales of investment securities, excluding short-term investments,
totaled $187,438,613.
As of October 31, 1997, accumulated net unrealized appreciation was
$26,485,664, based on the aggregate cost of investments for federal income tax
purposes of $212,625,391. Accumulated net unrealized appreciation consisted of
unrealized appreciation of $35,359,351 and unrealized depreciation of
$8,873,687.
14 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Period Indicated
1997(1)
PER-SHARE DATA
Net Asset Value,
Beginning of Period .......................................... $ 5.00
-------------
Income From Investment Operations
Net Investment Loss ........................................ (0.04)
Net Realized and Unrealized Gain on Investment Transactions 0.35
-------------
Total From Investment Operations ........................... 0.31
-------------
Net Asset Value, End of Period ............................... $ 5.31
=============
Total Return(2) ............................................ 6.20%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to Average Net Assets(3) ......... 1.49%
Ratio of Net Investment Loss to Average Net Assets(3) ........ (1.09)%
Portfolio Turnover Rate ...................................... 118%
Average Commission Paid per Share of Equity Security Traded .. $ 0.0251
Net Assets, End of Period (in thousands) ..................... $ 231,266
- ----------
(1) December 26, 1996 (inception) through October 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total returns for periods less than one year are not
annualized.
(3) Annualized.
See Notes to Financial Statements
ANNUAL REPORT FINANCIAL HIGHLIGHTS 15
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
American Century Mutual Funds, Inc:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century-Twentieth Century New
Opportunities Fund (the "Fund"), one of the funds comprising American Century
Mutual Funds, Inc. (formerly Twentieth Century Investors, Inc.), as of October
31, 1997, and the related statements of operations and changes in net assets for
the period December 26, 1996 (commencement of operations) through October 31,
1997, and the financial highlights for the period December 26, 1996
(commencement of operations) through October 31, 1997. These financial
statements and the financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American
Century-Twentieth Century New Opportunities Fund as of October 31, 1997, the
results of its operations, the changes in its net assets, and the financial
highlights for the period then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 26, 1997
16 INDEPENDENT AUDITORS' REPORT AMERICAN CENTURY INVESTMENTS
PROXY VOTING RESULTS
An annual meeting of shareholders was held on July 30, 1997, to vote on the
following proposals. All of the proposals received the required majority of
votes and were adopted.
A summary of voting results is listed below each proposal.
PROPOSAL 1:
To elect a Board of Directors of nine members to hold office for the ensuing
year or until their successors are elected and qualified.
James E. Stowers, Jr.
For: 26,842,276
Withheld: 525,140
James E. Stowers III
For: 26,878,978
Withheld: 488,438
Thomas A. Brown
For: 26,891,422
Withheld: 475,994
Robert W. Doering, M.D.
For: 26,844,725
Withheld: 522,691
D.D. (Del) Hock
For: 26,886,458
Withheld: 480,958
Linsley L. Lundgaard
For: 26,828,528
Withheld: 538,888
Donald H. Pratt
For: 26,894,770
Withheld: 472,646
Lloyd T. Silver, Jr.
For: 26,847,216
Withheld: 520,200
M. Jeannine Strandjord
For: 26,892,745
Withheld: 474,671
PROPOSAL 2:
To vote on approval of a Management Agreement with American Century Investment
Management, Inc.
For: 26,676,429
Against: 535,183
Abstain: 151,620
Broker Non-Vote: 4,184
PROPOSAL 3:
To vote on the selection by the Board of Directors of Deloitte & Touche LLP as
independent auditors for the Corporation.
For: 26,890,526
Against: 390,528
Abstain: 86,362
PROPOSAL 4:
To vote on the adoption of standardized investment limitations for the following
items:
* Eliminate the fundamental investment limitation concerning diversification of
investments.
For: 26,219,934
Against: 984,880
Abstain: 158,418
Broker Non-Vote: 4,184
* Amend the fundamental investment limitation concerning the issuance of senior
securities.
For: 26,261,298
Against: 943,516
Abstain: 158,418
Broker Non-Vote: 4,184
* Amend the fundamental investment limitation concerning borrowing.
For: 26,161,198
Against: 1,043,616
Abstain: 158,418
Broker Non-Vote: 4,184
ANNUAL REPORT PROXY VOTING RESULTS 17
PROXY VOTING RESULTS
* Amend the fundamental investment limitation concerning lending.
For: 26,164,116
Against: 1,040,698
Abstain: 158,418
Broker Non-Vote: 4,184
* Amend the fundamental investment limitation concerning concentration of
investments in a particular industry.
For: 26,175,486
Against: 1,029,328
Abstain: 158,418
Broker Non-Vote: 4,184
* Eliminate the fundamental investment limitation regarding investments in
illiquid securities.
For: 26,245,787
Against: 959,027
Abstain: 158,418
Broker Non-Vote: 4,184
* Eliminate the fundamental limitation concerning investment in other investment
companies.
For: 26,283,484
Against: 921,330
Abstain: 158,418
Broker Non-Vote: 4,184
* Amend the fundamental investment limitation concerning investments in real
estate.
For: 26,291,492
Against: 913,322
Abstain: 158,418
Broker Non-Vote: 4,184
* Amend the fundamental investment limitation concerning underwriting.
For: 26,323,965
Against: 880,849
Abstain: 158,418
Broker Non-Vote: 4,184
* Amend the fundamental investment limitation concerning commodities.
For: 26,187,742
Against: 1,017,072
Abstain: 158,418
Broker Non-Vote: 4,184
* Eliminate the fundamental limitation concerning investments in issuers with
less than three years of continuous operations.
For: 26,318,280
Against: 886,534
Abstain: 158,418
Broker Non-Vote: 4,184
* Eliminate the fundamental limitation concerning short sales.
For: 26,272,567
Against: 932,247
Abstain: 158,418
Broker Non-Vote: 4,184
* Eliminate the fundamental investment limitation concerning margin purchases of
securities.
For: 26,262,023
Against: 942,791
Abstain: 158,418
Broker Non-Vote: 4,184
18 PROXY VOTING RESULTS AMERICAN CENTURY INVESTMENTS
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
ANNUAL REPORT RETIREMENT ACCOUNT INFORMATION 19
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY AND POLICIES
The Twentieth Century Group offers 10 equity funds that invest in the stocks
of growing companies, both domestically and internationally. The philosophy
behind these growth funds focuses on three important principles. First, the
funds seek to own successful companies, which we define as those with growing
earnings and revenues. Second, we attempt to keep the funds fully invested,
regardless of short-term market activity. Experience has shown that market gains
can occur in unpredictable spurts and that missing those opportunities can
significantly limit the potential for gain. Third, the funds are managed by
teams rather than by one "star." We believe this allows us to make better, more
consistent management decisions.
In addition to these principles, each fund has its own investment policies.
TWENTIETH CENTURY NEW OPPORTUNITIES generally invests in the securities of
small companies that exhibit accelerating growth. The fund is subject to
significant price volatility, but offers high long-term growth potential.
COMPARATIVE INDICES
The following indices are used in the report to serve as fund performance
comparisons. They are not investment products available for purchase.
The S&P 500 is a capitalization-weighted index of the stocks of 500 publicly
traded U.S. companies that are considered to be leading firms in dominant
industries. Created by Standard & Poor's Corporation, it is considered to be a
broad measure of U.S. stock market performance.
The S&P MIDCAP 400 is a capitalization-weighted index of the stocks of the
400 largest leading U.S. companies not included in the S&P 500. Created by
Standard & Poor's Corporation, it is considered to represent the performance of
mid-cap stocks generally.
The RUSSELL 2000 INDEX was created by the Frank Russell Company. It measures
the performance of the 2,000 smallest of the 3,000 largest publicly-traded U.S.
companies based on total market capitalization. The Russell 2000 represents
approximately 10% of the total market capitalization of the top 3,000 companies.
The average market capitalization of the index is approximately $420 million.
The RUSSELL 2000 GROWTH INDEX measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher forecasted growth rates.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
- --------------------------------------------------------------------------------
Portfolio Managers Glenn Fogle
John Seitzer
- --------------------------------------------------------------------------------
20 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
AVERAGE ANNUAL RETURNS illustrate the annually compounded returns that would
have produced the fund's cumulative total returns if the fund's performance had
been constant over the entire period. Average annual returns smooth out
variations in a fund's return; they are not the same as fiscal year-by-year
results. For fiscal year-by-year total returns, please refer to the "Financial
Highlights" on page 15.
PORTFOLIO STATISTICS
NUMBER OF COMPANIES-- the number of different companies held by a fund on a
given date.
AVERAGE DIVIDEND YIELD OF HOLDINGS-- a percentage return calculated by
dividing a company's annual cash dividend by the current market value of the
company's stock.
PRICE/EARNINGS (P/E) RATIO-- a stock value measurement calculated by dividing
a company's stock price by its earnings per share, with the result expressed as
a multiple instead of as a percentage. (Earnings per share is calculated by
dividing the after-tax earnings of a corporation by its outstanding shares.)
PORTFOLIO TURNOVER-- the percentage of a fund's investment portfolio that is
replaced during a given time period, usually a year. Actively managed portfolios
tend to have higher turnover than passively managed portfolios such as index
funds.
EXPENSE RATIO-- the operating expenses of the fund expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF STOCKS
BLUE-CHIP STOCKS-- stocks of the most established companies in American
industry. They are generally large, fairly stable companies that have
demonstrated consistent earnings and usually have long-term growth potential.
Examples include General Electric and Coca-Cola.
CYCLICAL STOCKS-- generally considered to be stocks whose price and earnings
fluctuations tend to follow the ups and downs of the business cycle. Examples
include the stocks of automobile manufacturers, steel producers and textile
operators.
GROWTH STOCKS-- stocks of companies that have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples can include the stocks of high-tech,
healthcare and consumer staple companies.
LARGE-CAPITALIZATION ("LARGE-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of more than $5 billion. These tend to be the stocks that
make up the Dow Jones Industrial Average and the S&P 500.
MEDIUM-CAPITALIZATION ("MID-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of between $1 billion and $5 billion. These tend to be the
stocks that make up the S&P MidCap 400.
SMALL-CAPITALIZATION ("SMALL-CAP") STOCKS-- generally considered to be stocks
of companies with a market capitalization (the total value of a company's
outstanding stock) of less than $1 billion. These tend to be the stocks that
make up the Russell 2000 Index.
VALUE STOCKS-- generally considered to be stocks that are purchased because
they are relatively inexpensive. These stocks are typically characterized by low
P/E ratios.
STATISTICAL TERMINOLOGY
PRICE/BOOK RATIO-- a stock value measurement calculated by dividing a
company's stock price by its book value per share, with the result expressed as
a multiple instead of as a percentage. (Book value per share is calculated by
subtracting a company's liabilities from its assets, then dividing that value by
the number of outstanding shares.)
ANNUAL REPORT GLOSSARY 21
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-753-1865
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE
GENERAL INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
9712 [RECYCLED LOGO]
SH-BKT-10466 RECYCLED
<PAGE>
ANNUAL
REPORT
[american century logo]
American
Century(reg.sm)
OCTOBER 31, 1997
BENHAM
GROUP
High-Yield
TABLE OF CONTENTS
Report Highlights ......................................................... 1
Our Message to You ........................................................ 2
Market Perspective ........................................................ 3
Credit Review ............................................................. 4
Performance & Portfolio Information ....................................... 5
Management Q & A .......................................................... 6
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statement of Changes in Net Assets ........................................ 12
Notes to Financial Statements ............................................. 13
Financial Highlights ...................................................... 15
Independent Auditors' Report .............................................. 16
Retirement Account Information ............................................ 17
Background Information
Investment Philosophy & Policies ............................... 20
Comparative Indices ............................................ 20
Lipper Category ................................................ 20
Investment Team Leaders ........................................ 20
Glossary .................................................................. 21
American Century Investments offers you nearly 70 fund choices covering
stocks, bonds, money markets, specialty investments and blended portfolios.
We've organized our funds into three distinct groups, based on investment style
and objectives, to help simplify your fund decisions. These groups appear below.
AMERICAN CENTURY INVESTMENTS--FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Benham American Century Twentieth Century(reg. tm)
Group(reg. tm) Group Group
- -------------------------------------------------------------------------------
MONEY MARKET FUNDS ASSET ALLOCATION & GROWTH FUNDS
GOVERNMENT BOND FUNDS BALANCED FUNDS INTERNATIONAL FUNDS
DIVERSIFIED BOND FUNDS CONSERVATIVE EQUITY FUNDS
MUNICIPAL BOND FUNDS SPECIALTY FUNDS
- -------------------------------------------------------------------------------
High-Yield
We welcome your comments or questions about this report.
See the back cover for ways to contact us by mail, phone or e-mail.
Twentieth Century and American Century are registered marks of American Century
Services Corporation. Benham Group is a registered mark of Benham Management
Corporation.
AMERICAN CENTURY INVESTMENTS
REPORT HIGHLIGHTS
MARKET PERSPECTIVE
* Steady economic growth and low inflation created a favorable environment for
U.S. bonds during the first ten months of 1997.
* Bonds produced solid returns, with longer-term securities performing better
than short-term securities.
* A vibrant economy and strong demand helped high-yield corporate bonds
outperform Treasury securities and other bonds during the period.
* Treasury bonds outperformed high-yield bonds in October, when a financial
meltdown in Southeast Asia led many investors to seek a "safe haven" in the
Treasury market.
CREDIT REVIEW
* A strong economy and stock market led to improved credit conditions for
high-yield corporate bonds.
* Credit rating upgrades outpaced downgrades, and defaults fell to historical
lows.
* The favorable environment and increased demand led to record new supply in
the high-yield sector.
* We expect to see a more global high-yield market going forward, with
increasing issuance in Europe.
MANAGEMENT Q&A
* From its inception on September 30, 1997, through October 31, 1997, the fund
outperformed the average high-yield fund, according to Lipper Analytical
Services.
* The fund holds a diversified portfolio of high-yield corporate bonds and has
an average maturity of approximately seven years.
* Nearly all of the fund's securities are rated B for credit quality.
* Looking ahead, we think high-yield bonds look attractive after
underperforming the broader bond market in October
* Going forward, we will likely maintain the fund's current average maturity,
but we plan to further diversify the fund's portfolio across industry
sectors as fund assets grow.
HIGH-YIELD
TOTAL RETURNS: AS OF 10/31/97
Since Inception -0.27%*
30-DAY SEC YIELD: 7.41%
NET ASSETS: $11.1 million
(AS OF 10/31/97)
INCEPTION DATE: 9/30/97
* Not annualized.
Many of the investment terms in this report are defined in the Glossary on page
21.
ANNUAL REPORT REPORT HIGHLIGHTS 1
OUR MESSAGE TO YOU
[photo of James E. Stowers III and James M. Benham]
We are proud to present our first annual report for the Benham High-Yield
fund. Opened on September 30, 1997, the fund was designed for long-term
investors who are looking for high current income and potentially higher returns
than those offered by more traditional, high-quality bond funds. In the
following pages, the fund's investment team provides details about the market
and how your fund was managed during the period.
To help us provide better investment services, we are taking steps to
strengthen our corporate team. In July, American Century agreed to enter into a
business partnership with J.P. Morgan & Co., Inc., which will become a
significant minority shareholder of American Century Companies, Inc. J.P. Morgan
has been in business for more than 150 years, serving institutions, governments
and individuals with complex financial needs.
Within the framework of this proposed relationship, American Century will
continue to operate as an independent company. Our corporate management team
will remain the same, and the Stowers family will retain voting control of the
company. No changes in your fund's investment managers, policies or fees are
anticipated as a result of this transaction.
Another step we took was to begin to address the year 2000 problem. As
detailed in numerous news reports, many of the world's computer systems are at
risk because they cannot distinguish the year 2000 from the year 1900. A team of
computer professionals is reviewing each of American Century's systems and
programs to identify and fix those that could cause problems. Our goal is to
have all of our computer systems and programs 100% year-2000 compliant by the
end of 1998.
On a more personal note, 1998 will be a landmark year for another reason. It
marks 40 years since Jim Stowers, Jr. launched the first two Twentieth Century
funds, Growth and Select. Not many fund companies have a 40-year track record,
nor have many built a fund family such as ours that consist of nearly 70 stock,
bond, money market and diversified funds to help you achieve your financial
goals.
We're proud of the investment tools and services we can offer you, and we're
looking forward to adding many more distinctive products for your use in the
coming years.
Sincerely,
/s/James E. Stowers III /s/James M. Benham
James E. Stowers III James M. Benham
Chief Executive Officer Vice Chairman
American Century Companies, Inc. American Century Companies, Inc.
2 OUR MESSAGE TO YOU AMERICAN CENTURY INVESTMENTS
MARKET PERSPECTIVE
[line graph - data below]
HIGH-YIELD/TREASURY YIELD SPREAD
in basis points (a basis point equals 0.01%)
High-Yield/Treasury
Yield Spread
1/97 336
2/97 307
3/97 329
4/97 343
5/97 318
6/97 320
7/97 329
8/97 318
9/97 313
10/97 361
This chart shows the yield difference, or spread, between the bonds in the DLJ
High Yield Index and comparable Treasury securities.
Source: Donaldson, Lufkin & Jenrette
STRONG U.S. BOND RETURNS
U.S. bonds produced favorable returns during the first ten months of 1997.*
Despite rising yields early in the year, bond yields fell overall during the
period, causing bond prices to rise. Long-term securities, which typically
benefit the most from falling interest rates, performed better than shorter-term
securities. For example, the 30-year Treasury bond returned 12.25% during the
ten-month period, while the two-year Treasury note posted a 5.46% return.
UNEXPECTEDLY LOW INFLATION
Bond yields rose throughout the first quarter of 1997 and continued their
upward trend in April. The U.S. economy grew at a 5% annual rate in the first
quarter of the year, and this strong growth led to fears of rising inflation. To
head off the perceived threat of inflation, the Federal Reserve raised
short-term interest rates in March. Rising yields in April reflected market
expectations for more Fed rate increases in 1997.
Economic growth slowed to a 3.5% annual rate during the summer, though this
was still a level of growth that has historically been accompanied by rising
prices. But the expected inflation never materialized--the consumer price index
rose at an annual rate of just 1.8% through the first ten months of 1997. As a
result, expectations for future Fed rate increases disappeared from the bond
market, and bond yields declined steadily after peaking in mid-April.
HIGH-YIELD BONDS BEAT BROADER MARKET
High-yield corporate bonds outperformed other sectors of the U.S. bond
market, including Treasury securities and investment-grade corporate bonds. The
Merrill Lynch High-Yield U.S. Corporate Index returned 10.72% during the first
ten months of 1997, while the Merrill Lynch U.S. Treasury/Agency Index had a
return of 7.89%.
Corporate bonds benefited from the vibrant national economy, which
strengthened U.S. businesses and bolstered corporate profits. In the high-yield
sector, declining default rates gave an extra boost to lower-rated securities.
The yield difference--or spread--between lower-quality corporate bonds and
Treasury securities compensates high-yield investors for the increased risk of
default. As the accompanying graph illustrates, this spread narrowed between
January and September, reflecting the reduced default rates among high-yield
bonds.
In October, a financial meltdown in Southeast Asia led to greater stock
market volatility around the world and caused many investors to seek refuge in
the relative safety of U.S. Treasury securities. As a result, yield spreads
between high-yield corporate bonds and Treasury securities widened in October
(see the graph).
* Although Benham High-Yield Fund began operations on September 30, 1997, this
overview covers the first ten months of 1997 to provide a broader perspective on
the market.
ANNUAL REPORT MARKET PERSPECTIVE 3
CREDIT REVIEW
Credit conditions for high-yield corporate bonds improved in 1997. The
strength of the U.S. economy helped boost corporate profit growth, and the
rising stock market encouraged many companies to issue new shares and use the
proceeds to pay off some of their debt. As a result, credit rating upgrades
outpaced downgrades in the high-yield sector, and defaults dropped to historical
lows.
Most of the credit upgrades among lower-quality corporate bonds occurred in
the top rating category (securities rated BB). In contrast, the lower rating
categories (such as securities rated CCC) saw more downgrades than upgrades.
After seven years of economic expansion, corporate balance sheets are
strong, and credit conditions are favorable. Confidence in the strength of the
U.S. economy and increased demand for high-yield securities has fueled a huge
amount of new issuance in this sector, including offerings that may have been
considered questionable five years ago. Nonetheless, credit quality among new
high-yield issues remains healthy.
New high-yield issuance is also spreading out around the globe. Currently,
most new high-yield securities are issued by companies in either the U.S. or
developing countries (known as "emerging markets"). Going forward, we expect
more high-yield debt issuance in other parts of the world, especially Europe.
Increased privatization and merger activity, combined with a greater investor
appetite for these securities, will likely lead to more issuance from European
corporations.
In managing the High-Yield fund, we will continue to focus on careful credit
analysis. The thorough research of our credit team is an integral part of the
security selection process for the fund.
4 CREDIT REVIEW AMERICAN CENTURY INVESTMENTS
PERFORMANCE & PORTFOLIO INFORMATION
LIFE OF FUND(1)
- -----------------------------------------------------------------------------
TOTAL RETURNS AS OF OCTOBER 31, 1997
High-Yield ...................................... -0.27%
DLJ High Yield Index ............................ -0.12%
Average High Current Yield Fund(2) .............. -0.49%
- ----------
(1) Inception date was September 30, 1997.
(2) According to Lipper Analytical Services.
See pages 20-21 for more information about returns, the comparative index and
the Lipper category.
[line chart - data below]
GROWTH OF $10,000 OVER LIFE OF FUND
$10,000 investment made 9/30/97
Value on 10/31/97
High-Yield DLJ High Yield
Bond Fund Index
Sep-97 $10,000 $10,000
Oct-97 $9,973 $9,988
Past performance does not guarantee future results. Investment return and
principal value will fluctuate, and redemption value may be more or less than
original cost.
The line representing the fund's total return includes operating expenses (such
as transaction costs and management fees) that reduce returns, while the index's
total return line does not.
PORTFOLIO AT A GLANCE
10/31/97
Number of Securities 32
Weighted Average Maturity 6.9 years
Average Duration 5.0 years
Expense Ratio 0.90%*
* Annualized.
YIELD AS OF OCTOBER 31, 1997
30-DAY
SEC
YIELD
High-Yield 7.41%
30-Day SEC Yield is defined in the Glossary on page 21.
ANNUAL REPORT PERFORMANCE & PORTFOLIO INFORMATION 5
MANAGEMENT Q&A
An interview with Theresa Fennell, a portfolio manager on the Benham
High-Yield fund investment team.
HOW DID THE FUND PERFORM?
From its inception date on September 30, 1997, through October 31, 1997, the
fund posted a total return of -0.27%, compared with the -0.49% average return of
the 213 "High Current Yield Funds" tracked by Lipper Analytical Services. (See
the Total Returns table on the previous page for other fund performance
comparisons.)
HOW WOULD YOU CHARACTERIZE THE FUND'S PERFORMANCE?
The fund has only been in operation for a month, so it's hard to draw any
meaningful conclusions. However, the fund outperformed the average high-yield
fund despite missing out on some potential income. After the fund commenced
operations on September 30, we invested its assets gradually during the first
two weeks of October as we found attractively valued securities. As a result,
the fund missed out on some interest income that it would have earned had it
been fully invested from the beginning.
HOW IS THE FUND'S PORTFOLIO CURRENTLY POSITIONED?
The fund holds a diversified portfolio of high-yield corporate bonds. The
biggest industry represented in the fund's portfolio is the telecommunications
industry (see the accompanying chart). Telecommunications companies are issuing
most of the new supply in the high-yield market, and their bonds tend to have
the highest yields.
WHAT ABOUT THE FUND'S AVERAGE MATURITY?
It's currently about seven years. We intend to keep the fund's average
maturity in a range of 7-9 years, while its duration will likely hover around
4.5 years. We prefer to maintain a relatively stable intermediate maturity
without making any interest rate bets. Instead, we try to add value through
careful credit analysis and security selection.
WHAT ARE THE FUND'S CREDIT STANDARDS?
The fund will focus its assets in the upper tiers of the high-yield
universe, meaning primarily securities rated BB and B (see the chart on page 7).
The fund may also invest in CCC-rated bonds, but we expect to hold few, if any,
of these securities.
Each security considered for purchase is evaluated by a team of credit
analysts, who will play a key role in finding undervalued companies and
attractive yields among low-rated corporate securities.
SPEAKING OF YIELD, WHAT ARE YOUR EXPECTATIONS FOR THE FUND'S YIELD?
We expect the yield to be higher going forward than it is currently. The
fund's 30-day yield of 7.41% reflects the first month of the fund's existence,
when we were still gradually investing its assets.
We're aiming for a yield that is at least 250 basis points (a basis point
equals 0.01%) higher than the yield of the 10-year Treasury bond. Recently,
10-year Treasury yields have hovered around 5.8%, so we would expect the fund's
yield to be more than 8% based on current market conditions. Of course, there is
no guarantee that the fund will reach this yield, and its yield will fluctuate
as interest rates and its holdings change.
TOP FIVE INDUSTRIES % of fund investments
As of
10/31/97
Wireless Communications 16%
Steel 14%
Energy 11%
Telephone Communications 10%
Metals & Mining 9%
6 MANAGEMENT Q & A AMERICAN CENTURY INVESTMENTS
MANAGEMENT Q&A
THE FUND CAN INVEST IN PREFERRED AND CONVERTIBLE STOCKS. DO YOU HAVE ANY PLANS
TO INVEST IN THESE SECURITIES IN THE NEAR FUTURE?
No. Right now, the most attractive values are in the high-yield bond market,
so we'll likely keep the fund's assets in bonds for the time being.
HAS THE FUND BEEN AFFECTED BY THE RECENT FINANCIAL MELTDOWN IN SOUTHEAST ASIA?
Not really. For the most part, we've avoided that area of the world, though
we do hold one security issued by the leading paper company in Indonesia.
Although this security, which is denominated in U.S. dollars, declined in value
following the sell-off in October, it makes up just 2% of the fund's portfolio,
so the impact on overall performance was small. We intend to hold on to this
security because we think the company is financially sound and well managed.
One side effect of the problems in Southeast Asia is the potential impact on
U.S. corporations that do business in the region. Concerns about this have
affected the corporate bond market to some degree in recent weeks.
LOOKING AHEAD, WHAT IS YOUR OUTLOOK FOR THE HIGH-YIELD BOND MARKET?
We think high-yield corporate bonds look relatively attractive after
underperforming the broader bond market in October. So far in November, Treasury
bonds have continued to benefit from investors looking to escape global stock
market volatility, while corporate bonds have been fairly stable. As a result,
we are still seeing good value in the high-yield corporate market.
WHAT ARE YOUR PLANS FOR THE FUND OVER THE NEXT SIX MONTHS?
We plan to maintain its current positioning, with an average maturity of
seven years. However, as the assets of the fund grow, we'll look to increase its
industry diversification.
For now, though, telecommunications securities still make up approximately a
quarter of the fund's portfolio. These bonds have the most attractive yields,
but they also involve greater risks--increased competition has led to more
merger-and-acquisition activity as companies jockey for position in the brave
new world of deregulated local, long-distance and cellular services. We've
positioned the remaining 75% of the fund's portfolio conservatively,
diversifying broadly across industry sectors.
[pie chart - data below]
PORTFOLIO COMPOSITION BY CREDIT RATING (as of 10/31/97)
AAA 3%
BB 4%
B 92%
Unrated 1%
See page 21 for credit rating guidelines.
ANNUAL REPORT MANAGEMENT Q & A 7
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount Value
- ------------------------------------------------------------------------------------
CORPORATE BONDS
BANKING--2.6%
<S> <C> <C>
$250,000 Bay View Capital Corp., 9.125%,
8/15/07 $ 258,125
40,000 Ocwen Capital Trust I, 10.875%,
8/1/27 42,400
-------------------
300,525
-------------------
BUSINESS SERVICES & SUPPLIES--4.3%
500,000 Unicco Service/Finance, 9.875%,
10/15/07 (Acquired 10/14/97,
Cost $497,650)(1) 502,500
-------------------
CHEMICALS & RESINS--2.3%
250,000 Texas Petrochemical Corp.,
11.125%, 7/1/01 275,000
-------------------
COMPUTER SOFTWARE & SERVICES--2.4%
250,000 Unisys Corporation, 12.00%,
4/15/03 281,875
-------------------
ENERGY (PRODUCTION &
MARKETING)--10.9%
$250,000 Cross Timbers Oil Co., 8.75%,
11/1/09 (Acquired 10/21/97,
Cost $250,000)(1) $ 252,500
500,000 Kelley Oil & Gas Corp., 10.375%,
10/15/06 522,500
500,000 Snyder Oil Corp., 8.75%,
6/15/07 505,000
-------------------
1,280,000
-------------------
ENVIRONMENTAL SERVICES--4.3%
500,000 Envirosource, Inc., 9.75%,
6/15/03 503,125
-------------------
HEALTHCARE--2.1%
250,000 Vencor, Inc., 8.625%, 7/15/07
(Acquired 10/9/97,
Cost $255,000)(1) 245,000
-------------------
Principal Amount Value
- ------------------------------------------------------------------------------------
MEDIA & BROADCASTING--5.6%
500,000 Fox Kids Worldwide Inc., 9.36%,
11/1/07 (Acquired 10/22/97,
Cost $303,070)(1)(2) 283,750
500,000 Intl. Cabletel Inc., 9.11%,
2/1/06(2) 367,500
-------------------
651,250
-------------------
METALS & MINING--9.2%
500,000 Kaiser Aluminum & Chemical Corp.,
12.75%, 2/1/98 538,125
500,000 Renco Metals Inc., 11.50%,
7/1/03 537,500
-------------------
1,075,625
-------------------
PAPER & FOREST PRODUCTS--8.9%
500,000 Gaylord Container Corp., 9.75%,
6/15/07 (Acquired 9/30/97,
Cost $508,750)(1) 510,000
250,000 Pindo Deli Fin Mauritius, 10.25%,
10/1/02 (Acquired 9/30/97,
Cost $253,125)(1) 235,625
275,000 Printpack Inc., 10.625%, 8/15/06 292,875
-------------------
1,038,500
-------------------
STEEL--13.5%
$500,000 Armco Inc., 9.00%, 9/15/07
(Acquired 10/3/97,
Cost $508,125)(1) $ 505,000
500,000 GS Technologies, 12.25%,
10/1/05 561,250
500,000 Keystone Consolidated Industries,
Inc., 9.625%, 8/1/07
(Acquired 9/30/97 through
10/1/97, Cost $514,063)(1) 518,750
-------------------
1,585,000
-------------------
See Notes to Financial Statements
8 SCHEDULE OF INVESTMENTS AMERICAN CENTURY INVESTMENTS
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
Principal Amount Value
- ------------------------------------------------------------------------------------
TELEPHONE COMMUNICATIONS--9.9%
500,000 Intermedia Communications Inc.,
8.89%, 7/15/02(2) 330,000
750,000 RCN Corp., 10.08%, 10/15/07
(Acquired 10/10/97,
Cost $436,740)(1)(2) 436,875
500,000 Teleport Communications Group Inc.,
7.86%, 7/1/07(2) 391,250
-------------------
1,158,125
-------------------
TEXTILES & APPAREL--2.2%
250,000 Nine West Group Inc., 9.00%,
8/15/07 (Acquired 9/30/97,
Cost $253,125)(1) 252,500
-------------------
WIRELESS COMMUNICATIONS--16.3%
250,000 Metrocall, Inc., 10.375%, 10/1/07 254,375
250,000 Metrocall, Inc., 9.75%, 11/1/07
(Acquired 10/16/97,
Cost $250,000)(1) 248,125
250,000 Microcell Telecommunications Inc.,
10.22%, 6/1/06(2) 165,625
500,000 NEXTEL Communications, Inc.,
8.47%, 8/15/04(2) 425,000
500,000 Telesystem International Wireless
Inc., 10.56%, 11/1/07
(Acquired 10/22/97,
Cost $299,575)(1)(2) 271,250
500,000 Western Wireless Corp., 10.50%,
2/1/07 537,500
-------------------
1,901,875
-------------------
TOTAL CORPORATE BONDS--94.5% 11,050,900
-------------------
(Cost $11,162,572)
TEMPORARY CASH INVESTMENTS
Repurchase Agreement, Goldman Sachs & Co.,
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.65%, dated 10/31/97,
due 11/3/97 (Delivery value $545,257) 545,000
Repurchase Agreement, Morgan Stanley Group
Inc., (U.S. Treasury obligations), in a joint
trading account at 5.60%, dated 10/31/97,
due 11/3/97 (Delivery value $100,047) 100,000
-------------------
TOTAL TEMPORARY CASH
INVESTMENTS--5.5% 645,000
-------------------
(Cost $645,000)
TOTAL INVESTMENT SECURITIES--100.0% $11,695,900
===================
(Cost $11,807,572)
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
(1) Security was purchased under Rule 144A of the Securities Act of 1933 and,
unless registered under the Act or exempted from registration, may only be
sold to qualified institutional investors. The aggregate value of
restricted securities at October 31, 1997, was $4,261,875, which
represented 38.5% of net assets. None of these securities are considered
to be illiquid.
(2) Step-coupon security. Yield to maturity at purchase is indicated. These
securities become interest bearing at a predetermined rate and future date
and are purchased at a substantial discount from their value at maturity.
See Notes to Financial Statements
ANNUAL REPORT SCHEDULE OF INVESTMENTS 9
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
ASSETS
Investment securities, at value
(identified cost of $11,807,572)
(Note 3) ............................................. $ 11,695,900
Cash .................................................... 74,470
Interest receivable ..................................... 170,660
-------------
11,941,030
-------------
LIABILITIES
Payable for investments purchased ....................... 858,781
Payable for capital shares redeemed ..................... 673
Payable for management fees (Note 2) .................... 8,215
Dividends payable ....................................... 1,369
-------------
869,038
-------------
Net Assets .............................................. $ 11,071,992
=============
CAPITAL SHARES,
$0.01 PAR VALUE
Authorized .............................................. 200,000,000
=============
Outstanding ............................................. 1,117,810
=============
Net Asset Value Per Share ............................... $ 9.91
=============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) ................. $ 11,183,664
Net unrealized depreciation on
investments (Note 3) .................................. (111,672)
-------------
$ 11,071,992
=============
See Notes to Financial Statements
10 STATEMENT OF ASSETS AND LIABILITIES AMERICAN CENTURY INVESTMENTS
STATEMENT OF OPERATIONS
SEPTEMBER 30, 1997 (INCEPTION) THROUGH OCTOBER 31, 1997
INVESTMENT INCOME
Income:
Interest ................................................ $ 77,934
---------
Expenses (Note 2):
Management fees ......................................... 8,462
---------
Net investment income ................................... 69,472
---------
UNREALIZED LOSS ON
INVESTMENTS (NOTE 3)
Change in net unrealized
depreciation on investments ............................. (111,672)
---------
Net unrealized
loss on investments ..................................... (111,672)
---------
Net Decrease in Net Assets
Resulting from Operations ............................... $ (42,200)
=========
See Notes to Financial Statements
ANNUAL REPORT STATEMENT OF OPERATIONS 11
STATEMENT OF CHANGES IN NET ASSETS
SEPTEMBER 30, 1997 (INCEPTION) THROUGH OCTOBER 31, 1997
Increase in Net Assets 1997
OPERATIONS
Net investment income ................................... $ 69,472
Change in net unrealized
depreciation on investments ........................... (111,672)
------------
Net decrease in net assets
resulting from operations ............................. (42,200)
------------
DISTRIBUTIONS TO
SHAREHOLDERS
From net investment income .............................. (69,472)
------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ............................... 11,671,040
Proceeds from reinvestment
of distributions ...................................... 65,996
Payments for shares redeemed ............................ (553,372)
------------
Net increase in net assets
from capital share transactions ....................... 11,183,664
------------
Net increase in net assets .............................. 11,071,992
NET ASSETS
Beginning of period
End of period ........................................... $ 11,071,992
============
TRANSACTIONS IN
SHARES OF THE FUND
Sold .................................................... 1,166,684
Issued in reinvestment
of distributions ...................................... 6,666
Redeemed ................................................ (55,540)
------------
Net increase ............................................ 1,117,810
============
See Notes to Financial Statements
12 STATEMENT OF CHANGES IN NET ASSETS AMERICAN CENTURY INVESTMENTS
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--American Century Mutual Funds, Inc. (the Corporation) is
registered under the Investment Company Act of 1940 as an open-end diversified
management investment company. American Century - Benham High-Yield Fund (the
Fund) is one of the thirteen series of funds issued by the Corporation. The
Fund's investment objective is to seek high current income by investing in a
diversified portfolio of high-yielding corporate bonds, debentures and notes.
The Fund invests primarily in lower-rated debt securities, which are subject to
greater credit risk and consequently offer higher yield. Securities of this type
are subject to substantial risks including price volatility, liquidity risk and
default risk. The Fund is authorized to issue two classes of shares: the
Investor Class and the Advisor Class. The two classes of shares differ
principally in their respective shareholder servicing and distribution expenses
and arrangements. All shares of the Fund represent an equal pro rata interest in
the assets of the class to which such shares belong, and have identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
for class specific expenses and exclusive rights to vote on matters affecting
only individual classes. Sale of the Advisor Class had not commenced as of
October 31, 1997. The following significant accounting policies, related to all
classes of the Fund, are in accordance with accounting policies generally
accepted in the investment company industry.
SECURITY VALUATIONS--Portfolio securities are valued through valuations
obtained through a commercial pricing service or at the mean of the most recent
bid and asked prices. When valuations are not readily available, securities are
valued at fair value as determined in accordance with procedures adopted by the
Board of Directors.
SECURITY TRANSACTIONS--Security transactions are accounted for on the date
purchased or sold. Net realized gains and losses are determined on the
identified cost basis, which is also used for federal income tax purposes.
INVESTMENT INCOME--Interest income is recorded on the accrual basis and
includes amortization of discounts and premiums.
REPURCHASE AGREEMENTS--The Fund may enter into repurchase agreements with
institutions that the Fund's investment manager, American Century Investment
Management, Inc. (ACIM), has determined are creditworthy pursuant to criteria
adopted by the board of directors. Each repurchase agreement is recorded at
cost. The Fund requires that the securities purchased in a repurchase
transaction be transferred to the custodian in a manner sufficient to enable the
Fund to obtain those securities in the event of a default under the repurchase
agreement. ACIM monitors, on a daily basis, the value of the securities
transferred to ensure the value, including interest, of the securities under
each repurchase agreement is equal to or greater than amounts owed to the Fund
under each repurchase agreement.
JOINT TRADING ACCOUNT--Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having management agreements with ACIM, may transfer
uninvested cash balances into a joint trading account. These balances are
invested in one or more repurchase agreements that are collateralized by U.S.
Treasury or Agency obligations.
INCOME TAX STATUS--It is the Fund's policy to distribute all net investment
income and net realized capital gains to shareholders and to otherwise qualify
as a regulated investment company under the provisions of the Internal Revenue
Code. Accordingly, no provision has been made for federal income taxes.
DISTRIBUTIONS TO SHAREHOLDERS--Distributions from net investment income are
declared daily and distributed monthly. Distributions from net realized gains
are declared and paid annually.
The character of distributions made during the year from net investment
income or net realized capital gains may differ from their ultimate
characterization for federal income tax purposes. These differences are due to
differences in the recognition of income and expense items for financial
statement and tax purposes.
ADDITIONAL INFORMATION--Certain officers and directors of the Corporation
are also officers and/or directors, and, as a group, controlling stockholders of
American Century Companies, Inc., the parent of the Corporation's investment
manager, ACIM, the Corporation's distributor, American Century Investment
Services, Inc., and the Corporation's transfer agent, American Century Services
Corporation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the period. Actual results could differ from these
estimates.
ANNUAL REPORT NOTES TO FINANCIAL STATEMENTS 13
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
2. TRANSACTIONS WITH RELATED PARTIES
The Corporation has entered into a Management Agreement with ACIM that
provides the Fund with investment advisory and management services in exchange
for a single, unified management fee per class. The Agreement provides that all
expenses of the Fund, except brokerage commissions, taxes, interest, expenses of
those directors who are not considered "interested persons" as defined in the
Investment Company Act of 1940 (including counsel fees) and extraordinary
expenses, will by paid by ACIM. The fee is computed daily and paid monthly based
on the Fund's class average closing net assets during the previous month. The
annual management fee for the Investor Class and Advisor Class is 0.90% and
0.65%, respectively.
The Board of Directors has adopted a shareholder services and distribution
plan for the Advisor Class, pursuant to Rule 12b-1 of the Investment Company Act
of 1940. The Advisor Class Master Distribution and Shareholder Services Plan
provides that the Funds will pay ACIM an annual distribution fee equal to 0.25%
and service fee equal to 0.25%. The fees are computed daily and paid monthly
based on the Advisor Class's average daily closing net assets during the
previous month. The distribution fee provides compensation for distribution
expenses incurred by financial intermediaries in connection with distributing
shares of the Advisor Class including, but not limited to, payments to brokers,
dealers, and financial institutions that have entered into sales agreements with
respect to shares of the Fund. The service fee provides compensation for
shareholder and administrative services rendered by ACIM, its affiliates or
independent third party providers.
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
Purchases of securities, excluding short-term investments, for the period
September 30, 1997 (inception) through October 31, 1997, totaled $11,152,861.
As of October 31, 1997, accumulated net unrealized depreciation for federal
income tax purposes was $111,672, which consisted of unrealized appreciation of
$29,107 and unrealized depreciation of $140,779. The aggregate cost of
investments for federal income tax purposes was the same as the cost for
financial reporting purposes.
14 NOTES TO FINANCIAL STATEMENTS AMERICAN CENTURY INVESTMENTS
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout the Period Ended October 31
Investor
Class
1997(1)
PER-SHARE DATA
Net Asset Value,
Beginning of Period .................................. $ 10.00
----------
Income From
Investment Operations
Net Investment Income .............................. 0.06
Net Unrealized
Loss on Investments ................................ (0.09)
----------
Total From
Investment Operations ................................ (0.03)
----------
Distributions
From Net Investment Income ......................... (0.06)
----------
Net Asset Value, End of Period ....................... $ 9.91
==========
Total Return(2) .................................... (0.27)%
RATIOS/SUPPLEMENTAL DATA
Ratio of Operating Expenses to
Average Net Assets ................................ 0.90%(3)
Ratio of Net Investment Income
to Average Net Assets .............................. 7.39%(3)
Portfolio Turnover Rate .............................. --
Net Assets, End
of Period (in thousands) ............................. $ 11,072
- ----------
(1) September 30, 1997 (inception) through October 31, 1997.
(2) Total return assumes reinvestment of dividends and capital gains
distributions, if any. Total return is not annualized.
(3) Annualized.
See Notes to Financial Statements
ANNUAL REPORT FINANCIAL HIGHLIGHTS 15
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Century Mutual Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of American Century - Benham High Yield
Fund (the "Fund"), one of the funds comprising American Century Mutual Funds,
Inc., as of October 31, 1997, and the related statements of operations and
changes in net assets for the period September 30, 1997 (commencement of
operations) through October 31, 1997, and the financial highlights for the
period September 30, 1997 (commencement of operations) through October 31, 1997.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of American Century -
Benham High Yield Fund as of October 31, 1997, the results of its operations,
the changes in its net assets, and the financial highlights for the period then
ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Kansas City, Missouri
November 26, 1997
16 INDEPENDENT AUDITORS' REPORT AMERICAN CENTURY INVESTMENTS
RETIREMENT ACCOUNT INFORMATION
As required by law, any distributions you receive from an IRA and certain
403(b) distributions [not eligible for rollover to an IRA or to another 403(b)]
are subject to federal income tax withholding at the rate of 10% of the total
amount withdrawn, unless you elect not to have withholding apply. If you don't
want us to withhold on this amount, you may send us a written notice not to have
the federal income tax withheld. Your written notice is valid for six months
from the date of receipt at American Century. Even if you plan to roll over the
amount you withdraw to another tax-deferred account, the withholding rate still
applies to the withdrawn amount unless we have received a written notice not to
withhold federal income tax within six months prior to the withdrawal.
When you plan to withdraw, you may make your election by completing our
Exchange/ Redemption form or an IRS Form W-4P. Call American Century for either
form. Your written election is valid for only six months from the date of
receipt at American Century. You may revoke your election at any time by sending
a written notice to us.
Remember, even if you elect not to have income tax withheld, you are liable
for paying income tax on the taxable portion of your withdrawal. If you elect
not to have income tax withheld or you don't have enough income tax withheld,
you may be responsible for payment of estimated tax. You may incur penalties
under the estimated tax rules if your withholding and estimated tax payments are
not sufficient.
ANNUAL REPORT RETIREMENT ACCOUNT INFORMATION 17
NOTES
18 NOTES AMERICAN CENTURY INVESTMENTS
NOTES
ANNUAL REPORT NOTES 19
BACKGROUND INFORMATION
INVESTMENT PHILOSOPHY & POLICIES
The Benham Group offers 38 fixed-income funds, ranging from money market
funds to long-term bond funds and including both taxable and tax-exempt funds.
Each fund is managed to provide a "pure play" on a specific sector of the
fixed-income market. To ensure adherence to this principle, the basic structure
of each fund's portfolio is tied to a specific market index. Fund managers
attempt to add value by making modest portfolio adjustments based on their
analysis of prevailing market conditions. Investment decisions are made by
management teams, which meet regularly to discuss market analysis and investment
strategies.
In addition to these principles, each fund has its own investment policies:
HIGH-YIELD seeks to provide a high level of interest income by investing in
a diversified portfolio of high-yielding fixed-income securities. The fund
invests primarily in lower-quality corporate bonds, with an emphasis on
securities rated BB or B. The fund has no average maturity limitations, but it
typically invests in intermediate-term bonds.
Lower-rated bonds may be subject to greater default risk, liquidity risk and
price volatility.
COMPARATIVE INDICES
The index listed below is used in the report for fund performance
comparisons. It is not an investment product available for purchase.
The DLJ HIGH YIELD INDEX is a broad index of corporate bonds with credit
ratings below investment grade. The index has an average maturity of 8 years and
an average credit rating of BB/B.
LIPPER CATEGORY
LIPPER ANALYTICAL SERVICES, INC. is an independent mutual fund ranking
service that groups funds according to their investment objectives. The Lipper
category for High-Yield is:
HIGH CURRENT YIELD FUNDS--funds that aim at high current yield from
fixed-income securities. No quality or maturity restrictions; funds tend to
invest in lower-grade debt issues.
- --------------------------------------------------------------------------------
INVESTMENT TEAM LEADERS
- --------------------------------------------------------------------------------
Portfolio Manager Theresa Fennell
Credit Research Manager Greg Afiesh
- --------------------------------------------------------------------------------
20 BACKGROUND INFORMATION AMERICAN CENTURY INVESTMENTS
GLOSSARY
RETURNS
* TOTAL RETURN figures show the overall percentage change in the value of a
hypothetical investment in the fund and assume that all of the fund's
distributions are reinvested.
YIELDS
* 30-DAY SEC YIELD represents net investment income earned by the fund over a
30-day period, expressed as an annual percentage rate based on the fund's share
price at the end of the 30-day period. The SEC yield should be regarded as an
estimate of the fund's rate of investment income, and it may not equal the
fund's actual income distribution rate, the income paid to a shareholder's
account, or the income reported in the fund's financial statements.
PORTFOLIO STATISTICS
* NUMBER OF SECURITIES--the number of different securities held by a fund on a
given date.
* WEIGHTED AVERAGE MATURITY (WAM)--a measurement of the sensitivity of a
fixed-income portfolio to interest rate changes. WAM indicates the average time
until the securities in the portfolio mature, weighted by dollar amount. The
longer the WAM, the more interest rate exposure and sensitivity the portfolio
has.
* AVERAGE DURATION--another measure of the sensitivity of a fixed-income
portfolio to interest rate changes. Duration is a time-weighted average of the
interest and principal payments of the securities in a portfolio. As the
duration of a portfolio increases, so does the impact of a change in interest
rates on the value of the portfolio.
* EXPENSE RATIO--the operating expenses of the fund, expressed as a percentage
of average net assets. Shareholders pay an annual fee to the investment manager
for investment advisory and management services. The expenses and fees are
deducted from fund income, not from each shareholder account. (See Note 2 in the
Notes to Financial Statements.)
TYPES OF FIXED-INCOME SECURITIES
* CORPORATE BONDS--debt securities or instruments issued by companies and
corporations. Short-term corporate securities are tyically issued to raise cash
and cover current expenses in anticipation of future revenues; longer-term
corporate securities are issued to finance capital expenditures, such as new
plant construction or equipment purchases.
CREDIT RATING GUIDELINES
Credit ratings are issued by independent research companies such as Standard
& Poor's and Moody's. Ratings are based on an issuer's financial strength and
ability to pay interest and principal in a timely manner.
Securities rated AAA, AA, A, or BBB are considered "investment-grade"
securities, meaning they are relatively safe from default. The High-Yield fund
invests in securities that are below investment grade, including those with the
following credit ratings:
BB--securities that are less vulnerable to default than other lower-quality
issues but do not quite meet investment-grade standards.
B--securities that are more vulnerable to default than BB-rated securities
but whose issuers are currently able to meet their obligations.
CCC--securities that are currently vulnerable to default and are dependent
on favorable economic or business conditions for the issuers to meet their
obligations.
It's important to note that credit ratings are subjective, reflecting the
opinions of the rating agencies; they are not absolute standards of quality.
ANNUAL REPORT GLOSSARY 21
[american century logo]
American
Century(reg.sm)
P.O. BOX 419200
KANSAS CITY, MISSOURI
64141-6200
INVESTOR SERVICES:
1-800-345-2021 OR 816-531-5575
AUTOMATED INFORMATION LINE:
1-800-345-8765
TELECOMMUNICATIONS DEVICE FOR THE DEAF:
1-800-634-4113 OR 816-444-3485
FAX: 816-340-7962
INTERNET: WWW.AMERICANCENTURY.COM
AMERICAN CENTURY MUTUAL FUNDS, INC.
INVESTMENT MANAGER
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
KANSAS CITY, MISSOURI
THIS REPORT AND THE STATEMENTS IT CONTAINS ARE SUBMITTED FOR THE GENERAL
INFORMATION OF OUR SHAREHOLDERS. THE REPORT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
AMERICAN CENTURY INVESTMENT SERVICES, INC.
9712 [recycled logo]
SH-BKT-10502 Recycled
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